ESSAYS   IN   TAXATION 


ESSAYS   IN    TAXATION 


BY 


EDWIN   R.    A.    SELIGMAN 

PROFESSOR   OF  POLITICAL   ECONOMY  AND  FINANCE 
COLUMBIA   UNIVERSITY 


FOURTH  EDITION 


ff  orfe  , 

PRINTED  FOE  THE  COLUMBIA  UNIVERSITY  PRESS  BY 

THE   MACMILLAN   COMPANY 

LONDON:  MACMILLAN  &  CO.,  LTD. 

1903    . 

All  riyhU  reserved 


COPTBIOHT,  1895, 
BY  MACMILLAN  AND  CO. 


Set  up  and  electrotyped  October,  1895.      Reprinted  September, 
1897;  April,  1900;  July,  1903. 


J.  S.  Cuihing  k  Co.  -  Berwick  fe  Smith 
Norwood  Mass.  U.S.A. 


PREFACE   TO  THE  THIRD  EDITION 

THE  period  of  two  years  that  elapsed  between  the  first  and 
the  second  editions  of  this  work  was  so  short  as  to  call  for 
only  a  few  minor  corrections  and  alterations.  After  a  fur- 
ther interval  of  two  and  a  half  years,  the  third  edition  now 
appears.  During  this  period  there  have  been  many  changes 
in  detail  in  the  tax  laws  of  the  United  States  as  well  as  of 
Europe.  But  nothing  has  occurred  of  sufficient  importance 
in  principle  to  require  any  serious  modification  of  the  views 
originally  expressed.  The  alterations  in  the  present  edition 
are,  therefore,  confined  to  relatively  unimportant  matters, 
as  any  attempt  to  bring  all  the  facts  of  American  taxation 
down  to  date  would  have  necessitated  an  entire  rewriting 
of  a  large  part  of  the  work.  It  is  only  in  Chapter  V.  that 
the  requisite  changes  have  been  made.  In  the  remainder 
of  the  book,  unless  expressly  stated  to  the  contrary,  the 
facts  as  given  are  those  that  existed  at  the  time  of  the 
first  edition.  If  a  future  edition  should  be  called  for,  it  is 
hoped  that  the  discussion  may  be  brought  down  to  date. 

EDWIN   R.   A.    SELIGMAN. 


COLUMBIA  UNIVERSITY,  NEW  YORK, 
March,  1900. 


2209994    ' 


PREFACE  TO  THE  FIRST  EDITION 

OF  the  essays  published  in  this  volume  about  one-half 
are  new.  The  others  have  already  appeared  during  the 
past  five  years  in  various  scientific  periodicals,  like  the 
Political  Science  Quarterly,  Quarterly  Journal  of  Economics, 
Yale  Review  and  Journal  of  the  Social  Science  Association, 
but  have  been  revised  and  brought  down  to  date.  Although 
nominally  disconnected,  the  essays,  new  and  old,  which  are 
here  printed,  will,  I  trust,  be  found  not  to  be  entirely  lack- 
ing in  continuity,  or  unworthy  of  the  more  permanent  form 
which  they  now  assume.  Although  they  were  written 
primarily  from  the  American  point  of  view,  I  venture  to 
hope  that  the  discussions  of  theory  may  prove  to  be  of  a 
wider  interest. 

Several  colleagues  and  other  friends  have  aided  me  with 
advice  and  encouragement.  But  special  acknowledgments 
are  due  to  Mr.  Max  West,  Ph.D.,  lecturer  on  taxation  and 
finance  in  Columbia  College,  and  to  Mr.  Arthur  M.  Day, 
A.M.,  assistant  in  political  economy  and  social  science  in 
Columbia  College,  for  the  painstaking  care  with  which  they 
have  read  the  proofsheets,  and  for  the  many  suggestions, 
as  to  both  matter  and  form,  which  they  have  been  kind 
enough  to  make.  For  the  index  Dr.  West  is  responsible. 

BELLAGIO,  ITALY,  September,  1895. 

vi 


CONTENTS 


CHAPTER    L 

M4H 

THE  DEVELOPMENT  OF  TAXATION  .......  1 

I.    Voluntary  and  Compulsory  Payments       .        •        •        .  1 

IL    Direct  versus  Indirect  Taxation          .        ....  7 

HI.     The  Forms  of  Direct  Taxation 12 

IV.    Changes  in  the  Basis  of  Taxation     .        .       •       •       .  16 

CHAPTER  H. 

THE  GENERAL  PROPERTY  TAX        ...•••.  23 
I.    Practical  Defects        ...•••••24 

H.    History  of  the  Property  Tax      ......  37 

HI.     Theory  of  the  Property  Tax      ......  54 

IV.    Conclusion 59 

CHAPTER  UL 

THE  SINGLE  TAX      . .  64 

I.    What  is  the  Single  Tax  ? 64 

H.    The  General  Theory 66 

HI.     Practical  Defects 73 

1.  Fiscal  Defects.  2.  Political  Defects.  3.  Ethical 
Defects.  4.  Economic  Defects,  (a)  Effect  on  poor  com- 
munities ;  (6)  On  farmers  ;  (c)  On  rich  communities. 

V.     Conclusions 93 

vii 


viii  CONTENTS 

CHAPTER  IV. 

PAGE 

DOUBLE  TAXATION 95 

I.     By  the  Same  Authority 97 

1.  Property  and  Income.      2.  Property  and  Debts. 

3.  Corporations  and  Investors.     4.  Corporate  Property 
and  Stock. 

n.    By  Competing  Authorities 107 

CHAPTER   V. 
THE  INHERITANCE  TAX 121 

CHAPTER  VI. 

THE  TAXATION  OF  CORPORATIONS.    I.  HISTORY  ....    136 

I.     Early  Taxation 137 

II.     Development  of  the  Corporation  Tax        ....     141 

1.  Banks.     2.  Insurance  Companies.     3.  Railroads. 

4.  Other  Transportation  Companies.     5.  Miscellaneous 
Corporations.     6.  The  General  Corporation  Tax. 

HI.    Bases  of  the  Tax 176 

CHAPTER  VH. 

THE  TAXATION  or  CORPORATIONS.    II.  PRINCIPLES    .        .        .  180 

I.     The  Franchise  Tax 180 

H.    Economic  Theory 192 

ILL    Practical  Reforms 206 

CHAPTER  Vm. 

THE  TAXATION  OF   CORPORATIONS.     HI.  COMPLICATIONS  AND 

CONCLUSIONS 213 

I.    Property  and  Debts 213 


CONTENTS 


II.     Income  and  Property          .......  215 

HI.    Property  and  Stock     ........  218 

IV.     Double  Taxation  due  to  Conflicts  of  Jurisdiction      .        .  223 

1.  Interstate  Taxation  of  Corporate  Property.  2.  Of 
Corporate  Securities.  3.  Of  Non-resident  Security-hold- 
ers. 4.  Of  Receipts. 

V.  The  Corporation  and  the  Security-holder  ....  243 
VI.    Incidence    ....        ......  254 

VII.     Local  Taxation  .........  258 

VHI.     Conclusion  ..........  262 

CHAPTER  IX. 

THE  CLASSIFICATION  OF  PUBLIC  REVENUES  .....  265 

I.  The  Primary  Classification         .....        .  266 

IL     The  Police  Power  versus  the  Taxing  Power       .        .        .  269 

m.    Fees    ...........  274 

IV.     Special  Assessments   ........  282 

V.    Prices  ...........  292 

VI.  Conclusions        .........  302 

CHAPTER  X. 

RECENT  REFORMS  IN  TAXATION     .......  305 

I.     England      ..........  307 

H.    New  Zealand      .........  314 

HI.     Holland       ..........  322 

IV.    Prussia       ..........  330 

CHAPTER  XI. 

THE  BETTERMENT  TAX    .........  340 

I.     The  Origin          .........  340 

II.  Betterment  and  Taxation  .......  343 

ID.     The  Principle      .........  352 


x  COATEWTS 

CHAPTER  XH. 

MM 

RECENT  EUROPEAN  LITERATURE  IN  TAXATION     .       •       •       .  358 

I.     Germany 353 

n.    France 369 

HI.    Italy,  Holland  and  Spain 377 

IV.     Switzerland 384 

V.    England 389 

CHAPTER  Xm. 

AMERICAN  REPORTS  ON  TAXATION         ......  399 

I.    New  York  and  Massachusetts    ......  399 

II.    Illinois  and  Maryland         .......  401 

HI.    Maine  and  Pennsylvania    .......  404 

IV.     New  York  and  Ohio .  410 

V.    Massachusetts  and  Pennsylvania       •       .       •       .       .  416 


ESSAYS  IN  TAXATION. 

CHAPTER   I. 

THE  DEVELOPMENT  OF  TAXATION. 

To  the  citizen  of  the  modern  state,  taxation,  however  dis- 
agreeable it  may  be,  seems  natural.  It  is  difficult  to  realize 
that  it  is  essentially  a  recent  growth  and  that  it  marks  a  com- 
paratively late  stage  in  the  development  of  public  revenue  ; 
it  is  more  difficult  to  realize  that  each  age  has  its  own  sys- 
tem of  public  revenue,  and  that  the  taxes  of  to-day  are 
different  from  those  of  former  times  ;  it  is  still  more 
difficult  to  perceive  that  our  ideals  of  justice  in  taxation 
change  with  the  alteration  in  social  conditions.  Not  only 

- — Q  ••  ' •    •••     t    •  i  "  ....  i  .  • 

the  actual  forms  of  taxation,  but  the  theories  of  taxation  as 
well,  vary  with  the  economic  basis  of  society.  Fiscal  con- 
ditions are  always  an  outcome  of  economic  relations.  This 
is  true  even  where  the  direct  influence  of  political  causes 
is  traceable,  for  political  changes  are  in  the  last  resort  de- 
pendent on  economic  changes.  Finance  and  economics  are 
inextricably  intertwined.  Like  all  the  facts  of  social  life, 
taxation  itself  is  only  an  historical  category. 

I.    Voluntary  and  Compulsory  Payments. 

At  the  beginning  of  history  there  is  no  such  thing  as  a 
state.     Whether  we   accept   Hobbes'  theory  of   the    bellum 
omnium   contra  omnes,   or   the  more  modern  clan  theory   of 
B  l 


2  ESSAYS  IN  TAXATION 

the  origin  of  society,  there  is  no  public  household,  because 
there  are  no  recognized  public  needs.  But  even  in  the  origi- 
nal man  there  are  possibilities  of  social  development.  Man, 
as  Aristotle  tells  us,  is  a  social  and  political  animal. 
Centuries  of  hard  experience  strengthen  the  social  instinct 
and  contribute  to  form  primitive  society,  until  finally  a  real 
political  life  emerges. 

Gradually  from  either  physical,  ethical  or  religious  reasons 
a  leader  evolves.  The  oldest  or  the  wisest  or  the  bravest  — 
at  all  events,  the  one  possessed  of  some  peculiar  character- 
istic —  becomes  the  leader  of  the  horde,  the  clan  or  the 
tribe.  He  acts  as  the  great  priest,  great  judge  or  great 
warrior,  often  combining  all  three  qualities.  There  are 
no  financial  needs,  because  the  only  consideration  is  that 
of  defence ;  and  every  man  contributes  to  the  defence  in 
his  own  person.  The  leader  himself  subsists  on  the  booty 
of  war. 

But  with  the  growth  of  society  and  the  expansion  of  the 
clan  into  the  larger  community,  the  public  needs  develop. 
Administration  begins.  Roads,  bridges  and  fortifications 
are  constructed,  and  the  prince  or  king  must  now  not  only 
maintain  order,  but  must  be  assured  of  a  revenue  to  sup- 
port his  household  and  to  distribute  favors  to  his  retinue. 
All  his  followers,  being  roughly  equal,  now  support  him 
by  gifts,  whether  of  labor  or  of  property.  In  all  primi- 
tive societies  voluntary  offerings  constitute  the  first  form 
of  common  contributions,  and  every  man  feels  the  necessity 
of  upholding  the  political  and  military  organization  by  his 
own  personal  efforts. 

The  king's  needs  now  increase.  They  are  chiefly  per- 
sonal needs,  except  in  so  far  as  expenditures  are  made  for 
the  purposes  of  internal  peace  and  external  defence.  But 
in  order  to  ensure  his  position,  the  king  endeavors  to 
secure  his  revenues  elsewhere.  He  develops  the  subsidies 
and  tributes  of  the  allied  and  conquered  nations,  and 
amasses  treasure  filched  from  abroad.  Part  of  this  he  dis- 
tributes among  his  followers;  part  he  retains  to  increase 


THE  DEVELOPMENT  OF  TAXATION  3 

his  own  possessions.  The  private  property  of  the  king 
differentiates  itself  from  the  public  property,  which  was 
originally  common  to  all.  The  monarch  now  increases  his 
revenues  and  domains  through  the  acquisition  of  lucrative 
prerogatives  of  all  kinds.  Certain  activities  come  to  be 
looked  upon  as  within  his  peculiar  province.  The  king's 
peace  must  be  kept  —  any  infraction  must  be  paid  for  in 
fines  and  penalties ;  not  only  crimes,  but  torts,  have  their 
public  side.  Nobody  can  harm  an  individual  without 
breaking  the  king's  peace,  and  having  to  pay  for  it.  Com- 
merce begins,  and  weights  and  measures  and  money  are 
needed.  The  royal  rights  of  coinage  arise ;  and  as  the 
kingship  becomes  stronger,  the  rights  of  escheat,  of  wreck, 
of  confiscation  develop,  until  finally  the  various  royal  pre- 
rogatives bring  in  a  substantial  revenue. 

Voluntary  payments  have  in  the  meantime  ceased.  As 
society  advances,  what  was  at  the  outset  freely  given  comes 
to  be  paid  by  the  individual  from  a  sense  of  moral  obliga- 
tion. But  with  the  weakness  of  human  nature,  in  the  face 
of  a  diversity  of  interests,  even  the  feeling  of  duty  soon 
fails  to  produce  an  adequate  revenue.  The  moral  obligation 
slowly  becomes  a  legal  obligation,  keeping  pace  with  the 
crystallization  of  social  usage  and  custom  into  primitive  law ; 
the  voluntary  offerings  become  compulsory  contributions. 
But  the  compulsory  contributions  are  still  largely  personal 
services,  connected  with  the  common  security.  Such  was  the 
early  mediaeval  trinoda  necessitas,  the  liability  to  military  ser- 
vice, to  watch  and  ward,  and  to  the  repair  of  the  bridges  and 
fortifications.  The  first  forced  contribution  of  the  individual 
to  the  maintenance  of  the  common  welfare  is  always  seen  In 
this  rude  attempt  to  assess  every  one  according  to  his  ability 
to  bear  the  common  burden  —  his  faculty.  This  faculty 
consists  in  the  enforced  participation  in  the  administration. 
But  there  is  not  yet  any  idea  of  taxation  of  property.  The 
contribution  is  personal,  and  is  limited  to  a  few  well-defined 
objects.  The  individual's  faculty  is  found  in  his  person,  not 
in  his  property,  because  there  is  practically  no  private  prop- 


4  ESSAYS  IN  TAXATION 

erty.  And  the  contributions  are,  for  the  most  part,  not 
regular,  but  spasmodic. 

As  civilization  gradually  advances,  private  property 
develops,  and  the  primitive  equality  slowly  disappears. 
The  interchange  of  commodities  takes  place  on  a  larger 
scale.  The  old  revenues  are  no  longer  adequate,  and  it 
becomes  necessary  for  the  monarch  to  supplement  them  by 
broadening  the  field  of  these  compulsory  contributions  of 
service.  In  other  words,  the  need  of  taxation  arises.  But 
a  direct  tax  is  still  out  of  the  question.  Public  opinion  will 
not  yet  admit  its  necessity.  The  taxation  of  property  is 
scarcely  less  impossible  than  the  taxation  of  the  person.  It 
%  is  regarded  as  a  badge  of  disgrace  for  the  freeman  —  a  nota 
captivitatis,  as  the  Romans  at  first  called  it  — ,  because  only 
conquered  enemies  have  to  pay  this  arbitrary  impost.  The 
king,  therefore,  must  endeavor  to  effect  his  object  covertly. 
He  must  go  to  work  in  a  roundabout  way,  and  hide  the  tax 
in  a  variety  of  disguises.  He  either  gradually  extends  his 
lucrative  prerogatives,  or  alleges  that  the  charges  are  simple 
returns  for  governmental  services.  He  grants  protection  or 
privileges  to  individuals,  and  requires  some  payment  in 
return.  Thus  begins  the  period  of  fees  and  charges,  which 
the  individuals  are  willing  to  pay  and  which  gradually  recon- 
cile the  public  to  the  idea  of  governmental  charges. 

But  before  long  the  monarch  feels  able  to  throw  off  all 
disguises,  and  limits  the  amount  of  his  exactions  only  by  the 
degree  of  his  rapacity.  Thus  the  fees  and  tolls  change  into 
taxes  on  exchange  and  transportation ;  thus  the  people  be- 
come accustomed  to  the  "  customs  " ;  thus  the  "  evil  duties  " 
and  the  excises  grow  apace ;  thus  the  payments  become 
veritable  "impositions."  In  other  words,  the  community 
enters  upon  the  stage  of  indirect  taxation. 

This  explains  why  it  is  so  difficult  for  the  idea  of  direct 

taxation  to  force  its  way  into  popular  favor.     The  earliest 

manifestations  of  the  taxing  power  are  generally  merciless 

•  and  brutal.     They  are  apt  to  react  on  the  public  consciousness 

and  to  stunt  the  growth  of  any  feeling  of  obligation.     It  is 


THE  DEVELOPMENT  OF  TAXATION  5 

not  until  public  morality  has  so  far  developed  as  to  introduce 
more  lenient  and  more  refined  processes  of  indirect  taxation 
that  we  discover  a  growing  willingness  on  the  part  of  the 
individual  to  pay  direct  taxes.  Another  reason  for  the  later 
appearance  of  direct  taxation  is  that  the  indirect  taxes  are 
often  paid  without  the  contributors  being  really  conscious  of 
it.  They  are  jealous  of  their  own  and  not  public-spirited.  ^ 
They  are  willing  to  give  only  that  the  loss  of  which  they  do 
not  feel.  But  whatever  be  the  reason,  it  is  clear  that  when 
this  final  stage  —  possible  only  after  centuries  of  laborious 
and  continued  exertion  —  has  been  reached,  we  enter  upon 
a  new  phase  in  the  history  of  finance.  The  readiness  to 
share  in  the  public  burdens  out  of  one's  property  presupposes  ^ 
a  far  higher  social  ethics  and  a  far  more  complex  society 
than  was  possible  in  the  simple  conditions  when  every  one 
was  willing  to  take  part  in  the  defence  of  the  village  or  the 
repair  of  the  roads.  Interests  have  now  become  specialized. 
It  needs  a  far  greater  sense  of  civic  obligation  to  submit 
cheerfully  to  direct  property  taxation  than  was  necessary  in 
primitive  times  for  the  putting  forth  of  mere  personal  exer- 
tions. Even  to-day  the  full  import  of  this  obligation  is  only 
inadequately  grasped.  Until  within  a  few  years  it  was 
deemed  necessary  to  base  the  theoretical  justification  of  tax-  V^* 
ation  on  fanciful  doctrines  of  contract,  of  protection  and  the 
like.  And  even  at  the  present  time,  those  who  cheerfully 
seek  to  contribute  their  share  to  the  common  burden  form 
the  exception,  not  the  rule.  But  even  the  imperfect  recog- 
nition of  this  duty  implies  a  highly  developed  political 
consciousness.  The  method  of  taxing  every  one  according 
to  his  property  is  the  first  rough  attempt  of  a  property-  ^ 
owning  community  (as  over  against  a  primitive  community) 
to  assess  each  member  according  to  his  relative  ability.  The 
introduction  of  the  direct  property  tax  is  a  vast  step  forward  ^ 
in  the  development  of  social  ethics. 

This  historical  process  is  well  illustrated  by  etymology. 
If  we  look  at  the  various  terms  applied  to  what  we  to-day 
call  a  tax,  we  shall  find  every  shade  of  the  development 


6  ESSAYS  IN"  TAXATION 

reflected  not  only  in  the  words  used  in  former  centuries,  but 
in  those  still  employed  to-day.  There  are  no  less  than  seven 
different  stages  in  this  etymological  growth. 

The  original  idea  was  that  of  gift.  The  individual  made 
a  present  to  the  government.  We  see  this  in  the  mediaeval 
Latin  term  donum  and  in  the  English  benevolence,  which  was 
used  far  into  the  middle  ages.  The  second  stage  was  reached 
when  the  government  humbly  implored  or  prayed  the  people 
for  support.  This  is  the  meaning  of  the  Latin  precarium, 
used  for  many  centuries  on  the  continent,  as  well  as  of  the 
German  Bede  (from  beten,  to  pray).  The  Landbede  was 
the  term  applied  to  the  land  tax  in  the  German  states  until 
quite  recently.  With  the  third  stage  we  come  to  the  idea 
of  assistance  to  the  state.  The  individual  felt  that,  if  not 
making  a  gift,  he  was  at  least  doing  the  government  a  favor. 
This  idea  is  expressed  in  the  Latin  adjutorium,  the  English 
aid  and  the  French  aide,  which  was  at  one  time  used  for  all 
kinds  of  taxes.  The  same  idea  is  discernible  in  the  English 
subsidy  and  contribution.  It  has  survived  in  the  German  term 
for  a  tax,  Steuer  (jsteuern,  to  help),  and  in  the  Scandinavian 
Jijelp.  In  France  contribution  is  even  to-day  commonly  used 
as  synonymous  with  tax. 

The  fourth  stage  of  development  brings  out  the  idea  of 
sacrifice  by  the  individual  in  the  interest  of  the  state.  He 
now  surrenders  something  for  the  public  good.  This  is  seen 
in  the  old  French  gabelle,  in  the  modern  German  Abgabe,  and 
in  the  familiar  Italian  dazio.  In  each  case  the  citizen  gives 
or  sacrifices  something.  With  the  fifth  stage  the  feeling 
of  obligation  develops  in  the  taxpayer.  The  English  duty 
was  not  originally  restricted  to  its  present  narrow  meaning 
in  the  United  States.  Here  it  is  usually  applied  to  import 
taxes  and  sometimes  to  the  internal  revenue  taxes.  But 
even  to-day  in  England  the  term  includes  some  of  the 
most  important  so-called  direct  taxes,  like  the  inheritance 
tax  and  the  income  tax.  It  is  not  until  the  sixth  stage  is 
reached  that  we  meet  the  idea  of  compulsion  on  the  part  of 
the  state.  We  see  this  in  our  impost  or  imposition,  as  well 


THE  DEVELOPMENT  OF  TAXATION  7 

as  in  the  French  impdt  and  the  Italian  imposta.  Although 
we  limit  the  term  to  a  certain  kind  of  tax,  the  French  use 
it  as  the  generic  epithet  par  excellence.  The  same  idea  is 
seen  in  the  German  Auflage  (something  "laid  on")  and 
Aufschlag  (something  "clapped  on"),  frequently  used  at 
present  for  certain  indirect  charges  on  commodities. 

With  the  seventh  and  final  stage  we  reach  the  idea  of  a 
rate  or  assessment,  fixed  or  estimated  by  the  government 
without  any  reference  to  the  volition  of  the  taxpayer.  We 
see  this  in  the  mediaeval  English  scot  (to  be  "at  scot  and 
lot "),  which  is  nothing  but  the  German  iSchoss  or  the  Scandi- 
navian skatt.  It  is  seen  in  the  German  Schatzung  (or 
estimate),  which  was  used  in  the  early  part  of  the  century. 
Above  all,  it  is  recognized  in  our  tax  (taxare,  to  fix,  to  esti- 
mate), the  French  taxe,  the  Italian  tassa  and  the  English  rate. 
It  is  worthy  of  note  that  in  the  middle  ages  "  tax  "  always 
meant  a  direct  tax,  for  which  a  regular  assessment  list  or 
schedule  was  made. 

II.    Direct  versus  Indirect  Taxation. 

With  the  introduction  of  direct  taxation,  the  progressive 
increase  of  public  revenues  becomes  far  easier.  This  is 
fortunate,  for  with  the  advance  of  civilization  the  public 
expenditures  grow  apace.  For  a  long  time,  as  we  have  seen, 
almost  the  only  aims  of  government  are  security  and  defence. 
But  as  economic  conditions  develop  and  various  classes 
of  society  differentiate,  more  attention  must  be  paid  to  mat- 
ters of  general  welfare.  Expenditures  for  commerce,  indus- 
try and  transportation  arise.  The  need  is  felt  for  better 
roads,  for  more  canals,  for  improved  methods  of  com- 
munication through  the  postal  service.  Then  the  less 
material  ends  of  government  are  recognized.  Education 
must  be  provided,  hospitals  and  asylums  must  be  erected,  and 
the  sanitary  conditions  must  be  looked  after.  Finally  comes 
the  immense  growth  of  the  modern  state,  with  its  new  func- 
tions due  partly  to  the  industrial  revolution,  partly  to  the 


8  ESSAYS  IN  TAXATION 

growth  of  democracy,  partly  to  the  recognition  in  legislation 
of  the  preventive  as  against  the  repressive  principle.  These 
new  functions  mean  fresh  expenditures  ;  and  these  expendi- 
tures mean  increased  taxes.  Thus  the  characteristic  mark 
of  the  modern  age  is  taxation  as  against  the  more  or  less 
self-sufficing  public  economy  of  former  times. 

Direct  taxation,  as  we  have  seen,  generally  forms  the  last 
step  in  the  historical  development  of  public  revenues.  At 
first  regarded  entirely  as  an  extraordinary  means  of  sup- 
port, it  gradually  assumes  the  character  of  an  ordinary 
form  of  revenue.  In  the  early  days  of  classic  antiquity 
the  direct  tax  was  used  only  in  very  exceptional  exi- 
gencies and  was,  in  fact,  regarded  as  a  compulsory  loan, 
to  be  repaid  in  the  future.  It  was  not  until  after  the 
establishment  of  the  Roman  Empire,  for  instance,  that  the 
regular  direct  taxation  of  Roman  citizens  began.  And 
the  same  process  may  be  observed  throughout  the  history 
of  many  mediaeval  states  down  to  the  most  recent  period  of 
European  and  American  history. 

In  some  cases,  however,  this  historical  process  assumes  a 
slightly  different  form.  It  depends  entirely  on  the  economic 
conditions  and  on  the  relative  importance  of  the  various 
social  classes.  For  instance,  it  is  incontrovertible  that  cer- 
tain kinds  of  indirect  payments  always  come  first,  as  has 
been  explained  above.  But  when  the  people  understand 
that  indirect  charges  on  commodities  increase  their  price 
and  thus  form  veritable  taxes,  it  sometimes  happens  that 
more  opposition  is  shown  to  indirect  than  to  direct  taxa- 
tion. In  such  cases  direct  taxes  furnish  the  ordinary 
revenue,  and  it  is  only  after  a  severe  struggle  that  indirect 
taxes  are  introduced. 

This  process  can  be  clearly  traced  in  the  history  of 
mediaeval  and  modern  revenue.  In  democratic  communi- 
ties, where  the  legislation  is  influenced  by  the  mass  of  the 
people,  we  commonly  discern  a  tendency  to  oppose  indirect 
taxes  on  consumption.  In  the  early  mediaeval  towns  the 
democratic  instincts  were  strong,  because  of  the  more  equal 


THE  DEVELOPMENT  OF  TAXATION  9 

distribution  of  property.  We  accordingly  find  that  the  rev- 
enue systems  was  based  largely  on  direct  payments,  and  that 
the  populace  rebelled  against  indirect  imposts.  But  on  the 
continent,  where  aristocratic  influences  gradually  became 
powerful  enough  to  break  down  the  communal  liberty  and 
democracy,  the  mass  of  the  people  were  ground  down  by 
taxes  on  the  necessaries  of  life,  while  the  wealthier  or  gov- 
erning classes  practically  escaped.  When  the  democratic 
upheaval  took  place,  as  in  the  Italian  towns,  we  find  an 
attempt  to  reintroduce  the  old  order  of  things  and  to 
reach  the  wealthy  by  a  system  of  direct  taxes.  But  with 
the  downfall  of  the  mediaeval  democracy,  the  property  and 
income  taxes  disappeared,  while  the  octroi  and  municipal 
indirect  taxes  again  came  to  the  front.  Only  in  England, 
where  the  democratic  instincts  maintained  themselves  some- 
what more  strongly,  and  where  the  power  of  the  aristocracy 
was  held  in  check  by  a  strong  monarchy,  do  we  find  continued 
opposition  to  the  general  excises  and  to  local  taxes  on  the 
necessaries  of  life.  It  was  with  the  greatest  difficulty  that 
the  excise  system  was  introduced.  And  the  same  feeling 
was  awakened  under  similar  conditions  on  the  other  side 
of  the  Atlantic,  when  Hamilton  initiated  his  system  of  in- 
direct taxation  or  internal  revenue  in  the  federal  fiscal 
system  of  the  United  States.  "  The  time  will  come,"  said 
one  of  the  members  of  Congress  in  1790,  "when  the  poor 
man  will  not  be  able  to  wash  his  shirt  without  paying  a 
tax."  With  the  advent  of  the  modern  democratic  state,  we 
notice  the  same  tendency.  Indirect  taxes,  says  Lassalle, 
are  taxes  on  labor.  Hence  the  efforts  of  modern  democ- 
racy in  England,  in  Switzerland  and  in  America  to  confine 
indirect  taxes  on  consumption  and  exchange  within  the 
narrowest  limits. 

On  the  other  hand,  there  is  a  counter-tendency  which 
has  frequently  been  overlooked.  Curious  as  it  may  seem, 
indirect  taxes  were  advocated  in  the  later  middle  ages  as  the 
means  of  introducing  not  inequality,  but  equality,  of  taxa- 
ation.  This  was  owing  to  the  fact  that  the  privileged  classes 


10  ESSAYS  IN"  TAXATION 

on  the  continent  had  succeeded  in  securing  virtual  immu- 
nity from  taxation.  The  nobles  were  largely  exempted  from 
the  land  tax,  while  the  clergy  and  the  wealthier  citizens  in 
general  were  able  to  a  large  degree  to  purchase  freedom 
from  the  tax  burdens.  What  was  more  natural  than  that 
the  statesmen  and  tax  reformers  should  attempt  to  make 
them  pay  something  through  taxes  on  their  expenditure, 
which  they  could  not  well  escape  ?  Their  plan,  it  is  true, 
no  longer  took  the  shape  simply  of  taxes  on  the  necessaries  of 
life  ;  it  was  now  expanded  into  the  single  tax  on  all  expense 
which  would  reach  the  rich  as  well  as  the  poor.  This  was  the 
idea  of  Colbert ;  and  it  has  been  the  idea  from  the  time  of 
Hobbes  and  Petty  of  all  enthusiasts  for  indirect  taxation  in 
England,  and  of  many  writers  in  Germany,  in  France  and  in 
Italy.  To-day  we  are  clamoring  for  the  abolition  of  indirect 
taxation ;  formerly  the  reformers  clamored  for  a  single  uni- 
versal indirect  tax.  The  explanation,  as  we  see,  is  simple. 

But  this  does  not  yet  answer  the  question  why  excise 
taxes  were  actually  introduced  into  England,  as  elsewhere,  in 
the  seventeenth  century.  The  fact  is  that  tax  reformers  can- 
not do  much  good  if  economic  conditions  are  not  ripe  for  their 
proposals.  It  must  be  confessed  that  according  to  the  expe- 
rience of  history  most  reforms,  in  finance  at  least,  are  due  to 
selfish  reasons ;  they  are  the  necessary  outcome  of  changes 
in  economic  relations  and  of  the  efforts  of  each  class,  whether 
it  be  the  small  or  the  large  class,  to  gain  some  advantage 
for  itself.  The  classic  home  of  the  excise  tax  or  indirect 
tax  on  business  and  trade  is  Holland.  It  is  well  known 
that  Holland,  during  the  sixteenth  and  seventeenth  cen- 
turies, had  become  the  leading  financial  and  trading 
nation  of  Europe.  In  the  other  countries  wealth  was  still 
centred  in  the  landed  interests,  and  the  whole  system  of 
taxation  was  largely  dominated  by  feudal  aristocratic  ideas. 
The  direct  taxes  were  land  taxes,  because  wealth  consisted 
chiefly  of  land  ;  but  the  landed  proprietors  sought  to  escape 
the  burden  by  assessing  real  property  as  low  as  possible 
and  by  putting  taxes  on  the  necessaries  of  life  of  the  poorer 


THE  DEVELOPMENT  OF  TAXATION  11 

classes.  In  Holland,  on  the  other  hand,  wealth  was  now 
largely  centred  in  the  moneyed  interest.  The  great  traders 
and  merchants  did  not  relish  any  direct  taxation  of  trading 
capital,  and  therefore  devised  a  system  of  indirect  taxation 
of  business  which  would,  as  they  thought  and  hoped,  be 
shifted  to  the  community  in  general,  and  to  the  poorer 
classes  in  particular.  Thus  developed  the  stamp  taxes,  the 
excise  taxes,  and  the  whole  host  of  indirect  taxes  for  which  / 
Holland  was  noted. 

The  seventeenth  century  marks  the  rise  of  the  trading 
class  in  England ;  "the  glorious  revolution"  was  a  revolution 
not  so  much  of  the  people  as  of  what  the  Socialists  love  to 
call  the  "bourgeois."  Puritanism  and  commercialism  went 
hand  in  hand,  and  the  downfall  of  the  Stuarts  not  only  put 
an  end  to  feudalism,  but  weakened  the  fiscal  ascendency  of 
the  landowner  —  an  ascendency  to  which  another  serious 
blow  was  given  by  the  abolition  of  the  Corn  Laws,  and  whose 
final  overthrow  in  England,  as  elsewhere,  is  fast  approaching. 
The  indirect  taxes  of  the  seventeenth  century  were  thus  the  ,. 
outgrowth  of  the  effort  on  the  part  of  the  commercial  classes 
to  escape  the  burdens  which  the  landowners  were  desirous 
of  placing  on  them.  The  selfish  designs  of  the  capitalists 
and  the  unselfish  ideas  of  the  tax  reformers  went  hand  in 
hand  to  widen  the  scope  of  indirect  taxes.  And  as  the 
trading  class  developed  in  the  other  countries,  the  system  of 
excise  spread  with  it.1  It  was  not  until  the  democratic  move- 

1  A  word  may  be  said,  in  passing,  about  our  present  attitude  toward  indi- 
rect taxes.  There  is  a  prodigious  amount  of  cant  on  this  topic.  Many 
thinkers  are  apt  to  make  common  cause  with  the  Socialists  in  demanding  the 
complete  abolition  of  the  so-called  indirect  taxes.  This  is  a  mistake.  There 
is  nothing  inherently  bad  about  an  indirect  tax,  nor  is  there  anything  in- 
herently good  about  a  direct  tax.  It  depends  entirely  upon  what  kind  of 
direct  or  indirect  tax  it  is.  A  direct  tax  on  the  laborer  is  not  necessarily 
good  because  it  is  direct ;  an  indirect  tax  on  the  luxury  of  the  rich  is  not 
necessarily  bad  because  it  is  indirect.  It  happens,  indeed,  that  most  of  the 
indirect  taxes  of  the  past  have  been  devised  by  the  powerful  in  order  that 
their  burden  might  fall  on  the  weak ;  but  it  is  by  no  means  impossible  to 
frame  a  system  of  taxes  on  consumption  which  will  supplement  other  taxes 
and  do  substantial  justice  to  all.  The  elaboration  of  this  point  must  be 
reserved  for  another  place. 


12  ESSAYS  IN  TAXATION 

ment  of  the  nineteenth  century,  when  the  system  of  excises 
was  recognized  as  a  burden  on  the  poorer  classes,  that  the 
number  of  commodities  subject  to  excise  was  gradually 
reduced. 

III.    The  Forms  of  Direct  Taxation. 

We  have  seen  the  economic  relations  which  condition  the 
interworking  of  direct  and  indirect  taxation.  Let  us  now 
endeavor  to  learn  how  these  economic  conditions  affect  the 
growth  of  direct  taxation  itself. 

In  primitive  society,  there  is  a  certain  rough  equality  in  the 
personal  status  and  the  personal  abilities  of  the  individual. 
Hence  the  idea  of  the  poll  or  capitation  tax,  which  is  the 
first  rude  manifestation  of  the  equities  of  taxation.  The 
members  of  a  club  to-day  pay  equal  dues,  because  their  inter- 
ests are  supposed  to  be  equal.  Club  life  does  not  cover  the 
whole  of  human  activity,  but  only  a  very  small  portion  of 
it.  So,  in  the  same  way,  as  long  as  economic  conditions  are 
primitive,  the  social  obligations  of  the  members  of  the  clan 
or  the  state  are  conceived  to  be  equal.  But  as  the  social 
conscience  develops,  more  stress  is  laid  on  other  elements  of 
ability  to  pay  than  on  mere  number.  Not  only  do  men  differ 
in  strength,  in  mental  vigor  and  in  opportunities,  but 
inequality  of  possessions  grows  greater.  And  with  differ- 
ences in  property,  the  old  feeling  of  equal  obligation 
weakens.  The  poll  tax  becomes  unjust  and  is  gradually 
abolished.  A  certain  phase  of  this  primitive  feeling  some- 
times persists  for  a  long  time,  especially  in  democracies 
where  political  equality  is  still  based  on  the  fiction  of  eco- 
nomic equality.  We  find  poll  taxes  as  adjuncts  to  other 
taxes  long  after  the  justification  of  a  single  poll  tax  has  dis- 
appeared. But  it  has  now  assumed  a  political  significance,  as 
in  Switzerland  and  in  some  of  the  American  commonwealths, 
where  its  payment  is  made  a  condition  of  the  suffrage. 
Even  this  tends  to  become  a  farce  to  the  extent  that  the 
payment  of  the  tax  is  assumed  by  the  political  parties.  The 


THE  DEVELOPMENT  OF  TAXATION  13 

economic  basis  of  the  poll  tax  has  entirely  vanished  and  it 
tends  to  be  replaced  by  the  property  tax. 

The  first  property  taxes  are  entirely  in  harmony  with 
the  facts  of  early  industrial  life.  It  is  a  matter  of  common 
knowledge  that  the  early  period  of  every  civilization  is 
marked  by  two  chief  facts,  the  almost  exclusive  prepon- 
derance of  agriculture  and  the  existence  of  slavery.  As 
Rodbertus  has  pointed  out,1  this  leads  to  a  fundamental 
distinction  between  ancient  and  modern  economic  theories. 
In  modern  civilization  we  have  not  only  a  quantitative 
division  in  wealth,  but  also  a  qualitative  difference.  That  is, 
not  only  are  there  rich  and  poor,  but  there  are  landowners, 
capitalists,  employers  and  laborers.  In  early  civilization 
there  was  a  quantitative  but  no  qualitative  distinction  in 
wealth.  All  property  consisted  simply  of  land  and  the  land- 
owner's household,  including  slaves  and  beasts  of  burden. 
There  was  no  important  capital  apart  from  this  landed 
property,  and  hence  there  were  no  distinct  shares  in  dis- 
tribution. But  Rodbertus  errs  in  confining  to  Greece  and 
designating  by  the  Greek  name  an  economic  system  which 
is  characteristic  of  all  early  civilizations.  It  was  as  true 
of  the  slave-holding  states  in  the  American  Union,  and 
of  the  mediaeval  manorial  system,  as  it  was  of  the  Hellenic 
civilization.  Wherever  we  find  only  agriculture  and  slav- 
ery, there  we  have  this  inseparable  mass  of  collective  prop- 
erty, not  yet  split  up  into  its  constituent  parts. 

The  importance  of  this  for  finance  lies  here :  since  we 
have  only  this  general  collective  property,  and  since  this 
property  consists  practically  of  land  and  the  means  to  till 
the  land,  the  direct  property  tax  must  take  the  shape  either 
of  the  land  tax  or  of  the  tax  on  the  cattle  or  slaves  or  imple- 
ments used  in  agriculture.  These  are  practically  tantamount 
to  each  other.  For  the  produce  of  two  given  portions  of  land 
will  vary  about  in  proportion  to  the  value  of  the  land, 

1  "  Untersuchungen  auf  dem  Gebiete  der  Nationalokonomie  des  klas- 
sischen  Alterthums,"  in  Hiltlebraud'st7a/ir&wcAer./Mr  Nationalokonomie  und 
Statistik,  iv.,  p.  343  et  seq. 


14  ESSAYS  IN  TAXATION 

together  with  the  amount  of  slaves  and  cattle  necessary  to 
till  it.  Everywhere  at  first,  therefore,  the  direct  property 
tax  is  found  to  be  either  the  land  tax  or  the  tax  on  agricult- 
ural capital.1  It  is  the  only  practicable  and  the  only  just 
form  of  taxation  at  this  early  period. 

But  it  is  important  to  notice  that  the  property  which  is 
now  taxed  is  not  so  much  property  in  land  as  property  in  the 
produce  of  land.  Whether  we  have  the  primitive  village 
community  or  only  the  system  of  common  cultivation,  the 
earliest  private  property  consists  of  the  produce  of  the  soil. 
The  first  attempt,  therefore,  to  take  account  of  the  grada- 
tions in  the  tax-paying  ability  of  the  individual  is  seen  in 
the  tax  on  gross  produce  —  the  tithe  or  any  other  portion  of 
the  produce  — ,  or  on  mere  quantity  of  the  land  irrespective 
of  value.  Since  land  itself  is  not  private  property,  since 
land  is  not  bought  or  sold,  the  faculty  of  the  taxpayer 
can  be  measured  not  by  the  value  of  the  land,  but  by  the 
value  of  its  produce,  which  is  in  some  proportion  to  the 
quantity  of  the  land.  Moreover,  in  early  agriculture,  where 
tilling  is  extensive  and  where  expenses  of  cultivation  vary 
but  little,  the  tax  on  gross  produce  is  a  fairly  accurate 
test  of  ability  to  pay. 

With  the  advance  in  population  and  the  necessity  of  more 
intensive  agricultural  methods,  owing  to  the  decay  of  the 
primitive  communal  system  and  the  growth  of  private  prop- 
erty in  land,  it  becomes  possible  to  measure  the  productivity 
of  land  in  terms  of  property.  Thus  the  land  taxes  of  this 
newer  stage  of  culture  are  property  taxes,  even  though  the 
value  of  the  property  is  fixed  sometimes  according  to  selling 
value,  sometimes  according  to  arbitrary  estimates  of  quality. 
But  where  the  survivals  of  primitive  conditions  are  strong, 
the  value  is  still  measured  in  terms  of  yield  or  produce, 
either  actual  or  computed.  In  the  early  middle  ages,  for 
instance,  land  taxes  were  not  based  directly  on  the 
selling  value,  because,  although  land  was  private  property, 

1  In  some  of  the  early  mediaeval  tax  systems,  these  were  specifically 
termed  cattle  and  land  taxes.  So  the  Vieh-  und  Klauensteuer  in  Germany. 


THE  DEVELOPMENT  OF  TAXATION  15 

it  was  not  bought  or  sold.  The  lands  had  rental  value, 
but  no  selling  value,  and  the  tax  was  assessed  not  so  much 
on  the  market  value  as  on  the  produce  of  land.  When  the 
American  colonies  were  founded,  private  property  in  land 
was  well  established  and  the  land  taxes  there  very  soon 
became  property  taxes,  although  we  not  infrequently  find 
examples  of  the  taxation  of  gross  produce  rather  than  of 
property.1  With  the  progress  of  cultivation  and  the  advance 
in  population,  the  tax  on  gross  produce  is  supplanted  by  the 
property  tax  on  market  value. 

But  now  comes  a  change  in  the  forms  of  economic  life  — 
a  change  that  inevitably  produces  an  effect  on  the  public 
conscience  and  on  the  accepted  ideas  of  justice.  In  the  first 
place,  with  increasing  prosperity  we  find  a  gradual  increase 
in  the  simpler  kinds  of  personal  property.  The  landowner's 
family  gradually  accumulates  money,  clothing  and  luxuries. 
If  the  general  property  tax  is  still  to  continue  a  fair 
evidence  of  individual  ability  to  pay,  personal  property  must 
be  taken  up  into  the  assessment  lists.  And  this,  in  fact, 
everywhere  occurs.  Not  only  the  real  estate,  but  also  the 
growing  personal  estate,  is  now  regarded.  At  first  this  per- 
sonalty will  consist  of  tangible,  visible  objects  not  easily 
concealed,  and  constituting  a  fair  index  of  the  citizen's  pros- 
perity. The  existence  of  this  scanty  stock  of  personalty 
will,  however,  still  be  in  harmony  with  the  early  economic 
system.  It  is  still  the  landowner  who  owns  the  personal 
property,  and  it  is  fitting  that  there  should  still  be  only  the 
general  property  tax.  The  economic  system  has  not  yet 
materially  altered. 

The  next  change,  however,  inaugurates  a  widely  different 
stage.  The  primitive  family  group  or  manorial  system 
decays.  Slavery  is  gradually  broken  down  by  manumis- 
sion or  abolition.  The  commercial  instinct  grows  stronger, 
and  trade  is  no  longer  limited  to  the  interchange  of  super- 
fluities between  adjacent  households.  What  Aristotle  de- 

1  For  details  see  my  article  on  "  Income  Taxes  in  the  American  Colonies," 
Political  Science  Quarterly,  x.  1895,  pp.  233,  234. 


16  ESSAYS  IN  TAXATION 

cries  as  the  gainful  pursuits  become  common  occupations. 
Capital  develops  and  free  laborers  appear.  The  original 
undifferentiated  mass  of  property  splits  up  into  separate 
parts.  The  landlord  is  no  longer  the  property  lord.  Per- 
sonal property,  in  the  shape  both  of  productive  capital  and 
of  unproductive  wealth,  increases  at  a  continually  accelera- 
ting ratio.  Finally,  as  in  our  modern  industrial  system,  the 
movables  outrank  the  immovables.  Realty  is  completely 
overshadowed  by  personalty,  in  both  extent  and  influence. 

Now  begins  the  contest  between  the  landed  and  the  moneyed 
interest,  between  rent  and  profit.  The  landowners  in  med- 
iaeval times,  like  the  farmers  in  our  own  time,  vainly 
attempt  to  expand  the  original  property  tax  so  as  to  include 
all  these  new  forms  of  property.  The  capitalist  and  moneyed 
class  either  seek  to  shift  the  burden  by  devising  the  indi- 
rect tax  of  which  we  have  spoken  above,  or  they  attempt 
to  escape  the  burden  entirely  through  evasion  or  through 
lax  administration  of  the  property  tax.  Where  the  differences 
in  wealth  become  striking  and  the  lower  classes  are  politically 
powerless,  the  landed  proprietors  and  the  traders  combine  to 
throw  the  burden  on  the  agricultural  laborers  and  the  urban 
artisans,  although  they  may  still  struggle  between  themselves 
as  to  the  division  of  the  remainder  of  the  burden.  Where 
aristocratic  conditions  prevail  less  strongly,  as  in  America 
up  to  the  present  time,  the  laborer  fares  better,  but  the 
contest  between  the  farmer  and  the  city  resident  assumes  a 
more  acute  form.  The  history*of  modern  taxation  is  largely 
the  history  of  these  class  antagonisms. 

IV.    Changes  in  the  Basis  of  Taxation. 

In  the  meantime  the  test  or  standard  of  individual  ability 
has  itself  undergone  a  change.  With  the  growing  differen- 
tiation of  society,  the  productive  powers  of  the  various  classes 
themselves  differ.  Moreover,  there  are  now  many  forms  of 
earnings  which  are  derived  not  from  property  but  from 
industry.  And  since  it  is  difficult  to  capitalize  industry,  it 


THE  DEVELOPMENT  OF  TAXATION  17 

is  the  product  of  the  industry  which  now  becomes  of  impor- 
tance. But  there  is  a  decided  difference  between  this  new 
system  of  taxes  on  product,  and  the  original  system  which 
preceded  the  first  property  tax.  In  the  original  system 
the  tax  was  on  gross  produce  or  on  mere  quantity  of  land. 
The  land  tax  was  either  the  tithe  or  some  definite  part  of 
the  estimated  produce.  Now  the  tax  is  on  net  produce. 
Allowance  is  made  for  expenses  of  cultivation.  Two  pieces 
of  land  may  yield  the  same  amount,  and  yet  the  outlay 
in  the  one  case  may  have  been  considerably  more  than 
the  other.  To  take  net,  instead  of  gross,  product  marks 
another  step  forward  in  the  evolution  of  the  idea  of  ability 
to  pay.  In  a  state  of  complete  mobility  of  capital  and  labor, 
it  perhaps  makes  no  difference  whether  we  take  the  market 
value  or  the  net  product  of  a  piece  of  property ;  for  the 
selling  price  of  property  tends  to  equal  the  capitalized  value 
of  the  revenue  derived  therefrom.  But  in  actual  life,  where 
we  often  find  limitations  to  this  absolute  mobility,  there 
may  be  a  divergence  between  the  capitalized  value  of 
the  produce  and  the  actual  value  of  the  property.  Thus 
we  find  almost  everywhere  a  movement  to  replace  the 
property  tax  by  a  system  of  taxes  on  net  product  —  on  the 
product  of  land,  of  capital,  of  business,  of  labor,  etc.  This 
was  the  stage  reached  in  Europe  toward  the  end  of  the 
eighteenth  and  the  beginning  of  the  nineteenth  century. 

Relatively  good  as  this  system  was,  it  was  soon  seen  not 
to  be  entirely  satisfactory.  It  failed  to  respond  to  modern 
economic  conditions.  It  looked  at  the  produce  of  the  source 
of  industry,  rather  than  at  the  recipient  of  the  earnings;  it 
was  a  tax  on  things,  rather  than  on  persons;  it  abstracted 
from  the  personal  situation  of  the  taxpayer;  it  made  no  allow- 
ance for  indebtedness.  Just  as  the  tax  on  gross  produce  was 
defective  because  it  paid  no  attention  to  expenses  of  cultiva- 
tion, so  the  tax  on  net  produce,  while  in  itself  an  improve- 
ment, was  nevertheless  faulty  because  it  paid  no  attention  to 
what  may  be  called  the  personal  expenses  of  cultivation,  i.e. 
the  interest  on  indebtedness. 


18  ESS AyS  TN  TAXATION 

Thus  it  is  that  in  recent  decades  the  tendency  has  arisen 
to  substitute  personal  taxes  for  the  older  real  taxes,  and  to 
assess  the  individual  rather  than  the  thing  ;  or,  stating  it  in 
simpler  language,  to  put  revenue  or  income  in  the  place  of 
proceeds  or  earnings  as  the  test  of  taxation.  Just  as  a 
man's  ability  to  support  himself  or  his  family  is  seen  in  his 
income  or  revenue,  so,  in  the  same  way,  it  is  recognized  that 
the  test  of  a  man's  ability  to  support  the  state  is  to  be  found 
in  this  same  income  or  revenue.  From  the  modern  point  of 
view,  it  is  the  duty  of  the  citizen  to  support  the  government 
according  to  his  capacity  to  support  himself.  Income  or 
revenue  may  not,  indeed,  be  an  ideal  test;  for  there  is 
no  absolute  test  which  can  exactly  gauge  all  the  varying 
personal  circumstances  of  each  individual.  But  it  is  the 
best  workable  test  that  governments  can  secure,  and  it  is  in 
harmony  with  the  test  imposed  on  the  individual  by  the 
force  of  social  opinion  in  regard  to  his  duty  to  his  own 
family.  For  this  reason  modern  states  are  everywhere 
changing  their  revenue  systems,  so  that  the  taxes  shall  cor- 
respond, as  nearly  as  possible,  to  the  revenues  of  the  citizens. 
This  is  the  last  step  in  the  evolution.  But  precisely  because 
it  is  a  personal  tax,  rather  than  a  tax  on  things,  it  involves 
administrative  difficulties  and  presupposes  a  definite  stage 
of  social  morality  and  political  probity.  Where  this  stage 
has  not  yet  been  reached,  it  may  be  better  to  continue 
the  system  of  taxes  on  product  which  form  a  very  rough 
approximation  to  the  revenue  of  the  taxpayer,  than  to 
attempt  a  system  of  income  taxes  which  strives  to  reach  the 
revenue  more  closely.  But  whatever  may  be  the  momentary 
demand  of  expediency,  the  line  of  development  is  evident, 
and  the  ultimate  result  must  necessarily  harmonize  with  the 
facts  of  economic  and  social  relations. 

Let  us  test  the  theory  of  development  as  laid  down  in  the 
above  pages  by  a  reference  to  the  history  of  taxation  in 
America.  It  is  well  known  that  the  primitive  revenues  of 
the  colonies  were  composed  largely  of  voluntary  payments, 
of  subsidies  or  allowances  from  abroad,  of  quit-rents,  and 


THE  DEVELOPMENT  OF  TAXATION  19 

of  occasional  fees  and  fines  of  early  justice.  But  it  has 
usually  been  overlooked  that  when  the  voluntary  offerings 
turned  into  compulsory  contributions,  the  tax  systems  in 
the  various  colonies  were  quite  different. 

The  New  England  colonies  were  democratic  communities 
where  almost  every  one  owned  some  land,  and  where  the  dis- 
tribution of  property  was  fairly  equal.  We  therefore  find  as 
a  characteristic  mark  of  New  England,  in  addition  to  the 
primitive  poll  tax,  the  tax  on  the  gross  produce  of  land 
either  actual  or  computed  according  to  the  quantity  or  quality 
of  the  land.  This  slowly  grew  into  a  real  property  tax,  which 
soon  expanded  into  what  was  nominally  a  general  property  tax. 
And  this  itself  was  supplemented  by  a  tax  on  town  artisans 
and  others  who  subsisted  on  the  produce  not  of  their  prop- 
erty, but  of  their  exertions.  To  the  property  tax  was  now 
added  the  "  faculty  "  tax. 

In  the  Southern  colonies,  which  were  aristocratic  in  their 
economic  substratum,  the  land  tax  played  an  insignificant 
role,  because  the  large  landowners  naturally  objected  to 
bearing  the  burdens.  After  the  introduction  of  slavery  it 
became  difficult  to  retain  even  the  poll  tax,  which  when  laid 
on  slaves  is  practically  a  property  tax  on  the  slave  owner. 
Hence  we  see  a  system  of  indirect  taxes,  mainly  on  exports 
and  imports,  falling  with  special  weight  on  the  poorer  con- 
sumers. 

Finally,  in  the  middle  colonies,  above  all  in  New  Nether- 
land,  the  conditions  were  neither  democratic  nor  aristocratic. 
There  was  no  such  approach  to  equal  distribution  of  wealth 
as  in  New  England,  and  no  such  preponderance  of  the  landed 
interest  as  in  Virginia.  We  find  the  dominance  of  the  moneyed 
interest  or  of  the  trading  classes,  who  brought  with  them 
Dutch  instincts  and  Dutch  methods.  Accordingly,  there 
was  no  system  of  poll  and  property  taxes  as  in  New  England, 
and  no  system  of  indirect  taxes  on  exports  and  imports  as  in 
Virginia.  The  fundamental  characteristic  of  this  system  was 
the  introduction  of  the  excise  system  or  indirect  taxation  of 
trade,  which  was  borrowed  from  Holland,  just  as  we  find  the 


20  ESSAYS  IN  TAXATION 

excise  system  introduced  from  Holland  into  England  and  the 
other  European  countries  during  the  seventeenth  century. 
Each  section,  therefore,  had  a  fiscal  system  more  or  less  in 
harmony  with  its  economic  conditions.  It  was  not  until 
these  conditions  changed  during  the  eighteenth  century 
that  the  fiscal  systems  began  somewhat  to  approach  each 
other;  and  it  was  not  until  much  later  that  we  find  through- 
out the  country  a  general  property  tax,  based  not  on  the 
produce,  but  on  the  market  value  of  the  property. 

The  same  divergence  of  economic  conditions  explains  what 
is  to-day  the  most  marked  distinction  in  the  United  States 
between  the  fiscal  systems  of  the  North,  the  South  and  the 
West.  In  the  Southern  states  up  to  the  civil  war,  the  inter- 
ests of  the  large  landed  proprietors  were  still  dominant. 
Under  the  federal  constitution,  it  was  impossible  for  them 
to  levy  import  or  export  duties.  For  a  time,  therefore, 
land,  as  the  only  source  of  wealth,  had  to  defray  the  public 
charges.  In  the  absence  of  industrial  centres,  there  was 
little  opportunity  for  taxation  of  personal  property.  As 
the  need  of  increased  revenues  was  felt,  the  landed  inter- 
ests attempted  to  secure  this  revenue  from  the  few  ordi- 
nary occupations  carried  on  outside  of  the  farms  and  estates. 
In  other  words,  the  license  or  privilege  system  was  estab- 
lished, which  levied  a  fixed  charge  on  well-nigh  every 
occupation.  It  was  not  until  after  the  middle  of  the  cen- 
tury that  the  general  property  tax  was  introduced  ;  but  even 
to-day  the  license  or  privilege  taxes  yield  a  large  share  of 
the  public  revenue. 

In  the  Northern  states,  on  the  other  hand,  where  the  busi- 
ness interests  were  more  powerful,  the  license  or  privilege 
system  never  attained  such  a  firm  foothold.  But  with  the 
breakdown  of  the  general  property  tax,  the  attempt  of  the 
general  public  to  secure  a  taxation  of  the  moneyed  interests 
has  taken  the  form  of  taxation  of  corporations  and  of  capital. 
There  are  plainly  visible  the  beginnings  of  a  system  of  taxa- 
tion of  net  product.  Finally,  in  the  Western  states,  where 
the  economic  conditions  are  as  yet  more  primitive,  there 


THE  DEVELOPMENT  OF  TAXATION  21 

have  been  only  sporadic  attempts  to  alter  the  general  prop- 
erty tax,  which  there  is  still  to  a  great  extent  a  tax  on  real 
estate.  But  with  the  gradual  unification  of  economic  condi- 
tions, which  is  slowly  taking  place  throughout  the  entire 
country,  we  may  expect  that  the  systems  of  taxation  will 
become  more  nearly  uniform,  until  the  results  of  modern 
industrial  and  democratic  development  will  finally  appear 
here,  as  they  are  appearing  in  other  parts  of  the  world. 
The  recent  attempt  to  introduce  a  federal  income  tax,  how- 
ever defective  the  measure  may  have  been,  is  a  significant 
evidence  of  the  trend.  That  this  attempt  will  ultimately 
be  followed  by  others,  not  necessarily  precisely  similar,  but 
yet  indicative  of  the  same  general  movement,  is  by  no  means 
improbable. 

From  the  above  survey  one  fact  stands  out  prominently. 
Amid  the  clashing  of  divergent  interests,  and  the  endeavor 
of  each  social  class  to  roll  off  the  burden  of  taxation  on 
some  other  class,  we  discern  the  slow  and  laborious  growth 
of  standards  of  justice  in  taxation,  and  the  attempt  on  the 
part  of  the  community  as  a  whole  to  realize  this  justice. 
The  history  of  finance,  in  other  words,  shows  the  evolution 
of  the  principle  of  faculty  or  ability  in  taxation  —  the  prin- 
ciple that  each  individual  should  be  held  to  help  the  state 
in  proportion  to  his  ability  to  help  himself.  In  the  earliest 
indirect  payments  there  was  no  idea  of  equity,  but  only  of 
force.  But  with  the  advance  of  civilization  and  social  ethics, 
we  reach  the  first  stage  of  rude  equality  in  the  poll  tax. 
Step  by  step  the  revenue  system  advanced  to  successively 
higher  planes.  Expenditure,  property,  product  —  each  of 
these  in  turn  was  considered  the  test  of  individual  capacity 
and  obligation  toward  the  state;  until  finally  in  modern  times 
revenue  or  iiicome  has  come  to  be  regarded  as  the  most  equita- 
ble and  the  most  practicable  measure  of  individual  and  social 
faculty.  To  arrange  a  system  of  taxation  which  shall,  on  the 
whole,  correspond  as  closely  as  possible  to  the  net  revenues 
of  individuals  and  social  classes,  and  which  shall  take  into 


22  ESSAYS  IN  TAXATION 

account  the  variations  in  tax-paying  ability,  has  thus  become 
the  demand  of  modern  civilization.  But  unless  this  system 
is  in  harmony  with  the  external  structure  and  the  inter- 
nal conditions  of  modern  economic  life,  it  is  foredoomed 
to  failure.  If  the  history  of  taxation  teaches  any  one  lesson, 
it  is  that  all  social  and  moral  advance  is  the  result  of  a  slow 
process  and  that  while  fiscal  systems  are  continually  modified 
by  the  working  out  of  ethical  ideals,  these  ideals  themselves 
depend  for  their  realization  upon  the  economic  forces  which 
are  continually  transforming  the  face  of  human  society. 


CHAPTER   II. 

THE   GENERAL  PROPERTY  TAX. 

THERE  is  perhaps  no  single  feature  of  our  modern  tax 
system  that  is  commonly  thought  to  be  more  thoroughly 
American  than  the  general  property  tax.  The  proportional 
taxation  of  all  property  is  held  to  be  the  result  of  an  instinc- 
tive feeling  original  to  and  thoroughly  ingrained  in  the  minds 
of  the  American  people.  And  yet  it  may  be  said  that  few 
institutions  have  evoked  of  late  more  angry  protests  and 
more  earnest  dissatisfaction  than  this  very  tax.  The  reason 
is  plain.  As  long  as  prosperity  was  general  and  the  public 
expenses  were  small,  taxation  was  light  and  its  burden  was 
scarcely  felt.  But  during  the  last  few  decades,  with  the  com- 
plicated demands  of  modern  civilization,  public  expenditures, 
both  local  and  national,  have  increased  to  such  an  extent  as  to 
exert  a  sensible  pressure  on  the  population.  The  problems  of 
public  revenue  have  been  pushed  to  the  front.  The  expres- 
sions of  discontent  with  various  phases  of  the  financial  system 
have  become  numerous  and  loud.  But  for  the  most  part  the 
discussion  has  been  superficial  and  the  conclusions  reached 
have  been  inadequate. 

The  opponents  of  the  general  property  tax  have  confined 
themselves  to  a  portrayal  of  its  practical  shortcomings.  No 
one  has  hitherto  attempted  to  give  the  deeper  reasons  why 
the  property  tax  is  unsuited  to  the  present  generation,  or  to  dis- 
cuss the  subject  in  its  wider  relations  to  the  science  of  finance. 
It  is  proposed  in  this  chapter  to  show  that  the  property  tax 
is  by  no  means  original  to  America,  but  that  it  has  gone 
through  precisely  the  same  evolution  in  many  other  places. 
It  is  further  proposed  to  prove  that  the  property  tax  is  as 

23 


24  ESSAYS  IN  TAXATION 

destitute  of  theoretical  justification  as  it  is  defective  in  its 
practical  application.  And  it  is  proposed,  finally,  to  discuss 
the  reforms  of  our  direct  taxation  —  some  of  them  partly 
completed,  some  projected,  and  some  hitherto  neglected. 

I.    Practical  Defects. 

The  defects  of  the  general  property  tax  may  be  treated 
under  five  heads.1 

1.  Lack  of  uniformity,  or  inequality  of  assessment.  The 
property  tax  with  us  is  an  apportioned,  not  a  percentage  tax. 
According  to  the  latter  method,  the  tax  would  be  levied  on 
the  individual  taxpayer  by  means  of  a  fixed  rate  or  percent- 
age of  all  property.  According  to  the  actual  method,  the 
total  amount  to  be  raised  by  the  state  is  first  ascertained 
and  is  then  apportioned  to  the  various  subdivisions  accord- 
ing to  the  appraised  valuation  in  each.  The  final  rate  of 
taxation  is  obtained  by  adding  the  local  tax  to  the  state  tax. 
The  rate  of  taxation  ought  therefore  to  vary  only  with  the 
local  needs,  and  would  indeed  so  vary  if  property  were 
everywhere  assessed  uniformly.  As  an  actual  fact,  however, 
this  is  far  from  being  the  case.  In  most  of  the  common- 
wealths the  tax  laws  provide  for  the  assessment  of  property 
at  its  "fair  cash  value."  And  in  all  the  states  it  is  expected 
that  the  valuation  shall  everywhere  be  made  at  a  uniform 
rate.  Yet  it  is  a  notorious  fact  that  in  scarcely  any  two 
\  contiguous  counties  is  the  property  —  even  the  real  estate  — 
J  appraised  in  the  same  manner  or  at  the  same  rate.  In  regard 
\  to  the  manner,  it  frequently  happens  that  corporation  prop- 

1  In  a  monograph  by  the  present  writer  entitled  Finance  Statistics  of  the 
American  Commonwealths  (Publications  of  the  American  Statistical  Asso- 
ciation, Dec.  1889)  may  be  found  a  large  number  of  citations  from  the  com- 
monwealth financial  reports  for  the  preceding  year.  The  reader  is  referred 
to  that  publication  for  the  verification  of  statements  for  which  no  special 
authority  is  adduced  in  these  pages.  See  especially  pp.  401-417.  Many 
facts  and  figures  may  also  be  found  in  Ely,  Taxation  in  American  States 
and  Cities,  1887.  See  also,  for  some  striking  statistics,  T.  G.  Shearman,  Taxa- 
tion of  Personal  Property,  impracticable,  unequal  and  unjust,  1895. 


THE  GENERAL  PROPERTY  TAX  25 

erty,  e.g,  the  roadbed  of  a  railway,  is  assessed  in  one  county 
at  an  immense  sum  per  mile  and  is  treated  in  the  adjacent 
county  like  a  piece  of  grazing  land.1  In  regard  to  the  rate, 
the  assessors  follow  the  practice  sanctioned  by  local  usage,  or 
decide  by  mere  caprice.  The  official  reports  abound  with 
complaints  or  open  confessions  that  property  is  assessed  all 
the  way  from  par  to  one  twenty-fifth  of  the  actual  value. 
In  one  county  the  property  is  listed  at  its  full  worth  ;  in  the 
next  county  the  assessment  does  not  exceed  a  tithe  of  its 
value.2  That  this  is  a  glaring  infraction  of  the  fundamental 
rule  of  equality  in  taxation  is  apparent.  As  between  coun- 
ties it  leads  to  undervaluations  which  give  an  entirely  falla- 
cious view  of  the  public  resources;  as  between  individuals 
it  results  in  gross  injustice.  A  tax  rate  of  a  given  amount 
on  one  may  be  double,  quintuple,  or  decuple  the  nominally 
equivalent  tax  on  another.  The  first  constitutional  injunc- 
tion —  that  of  uniformity  of  taxation — is  flagrantly  violated. 
Assessors  are  compelled  openly  to  disregard  their  oaths,  or  to 
incur  certain  defeat  at  the  next  election.3  There  is  no  pre- 
tence of  complying  with  the  law. 

An  escape  from  these  evils  has  been  sought  in  the  crea- 
tion of  boards  of  equalization.  A  number  of  common- 
wealths4 have  attempted  to  correct  the  undervaluation  of 

1  In  New  York,  for  example,  two  adjoining  counties  made  a  difference  of 
$24,000  per  mile  in  assessing  the  same  railroad.    Other  counties  varied 
$20,000  per  mile.     Report  of  the  State  Assessors,  1879,  p.  19. 

2  Biennial  Report  of  the  Auditor  of  Public  Accounts  of  Nebraska,  1886, 
p.  4.     In  New  York  the  range  is  from  100  to  18  per  cent.     Report  of  the 
State  Assessors,  1883,  p.  3.     In  Illinois  the  range  is  from  100  to  5  per  cent. 
Report  of  the  Revenue  Commission  of  Illinois,  1886,  p.  ii. 

3  Report  of  the  State  Assessors  of  New  York,  1886,  p.  20.     The  report  for 
1884,  p.  4,  speaks  of  the  assessors'  open  "  intent  to  ignore  the  law."    In  one 
case  an  assessor  objected  to  a  certain  declaration,  and  asserted  that  it  would 
be  necessary  to  swear  the  merchant.     The  latter  answered  :  "If  you  swear 
me,  I'll  vote  against  you  next  time."     West  Virginia   Tax   Commission, 
Preliminary  Report,  1884,  p.  13. 

4  Boards  of  equalization  are  found  in  Arizona,  California,  Connecticut, 
Idaho,  Illinois,  Indiana,  Iowa,  Kansas,  Kentucky,  Michigan,  Minnesota,  Mis- 
souri, Montana,  Nebraska,  North  Dakota,  New  Hampshire,  New  Jersey,  New 
Mexico,  New  York,  Ohio,  Oregon,  South  Carolina,  South  Dakota,  Tennessee, 


26  ESS  Ays  IN  TAXATION 

the  county  officials  by  giving  a  state  board  power  to  raise 
or  lower  the  valuations  (or  in  some  cases  the  rates)  in  the 
hope  of  securing  a  substantial  uniformity.  In  a  few  states, 
like  South  Carolina  and  New  York,  the  power  extends  only 
to  the  equalization  of  real  estate  assessments.  In  some  cases, 
as  in  Illinois,  New  Jersey,  New  Mexico  and  Tennessee,  the 
board  may  change  the  valuations  of  individuals  also.  But  in 
most  cases  its  function  is  confined  to  the  equalization  of 
county  assessments,  while  the  county  boards  deal  with  assess- 
ments of  individuals.  These  efforts,  however,  have  been 
very  imperfectly  successful.  The  composition  of  the  boards 
is  such  as  to  render  any  comprehensive  scrutiny  of  the 
county  returns  almost  impossible.  Even  were  the  boards 
to  be  ideally  constituted  the  local  jealousies  and  bickerings 
would  still  continue  to  prevent  any  just  distribution  of  the 
burdens.1  The  officials  themselves  confess  that  such  distri- 
bution cannot  be  secured  under  the  present  system.2  Boards 
of  equalization  are  thus  at  best  mere  makeshifts,  —  clumsy 
attempts  to  accomplish  the  impossible.  As  it  has  been 
drastically  put :  "  A  people  cannot  prosper  whose  officers 
either  work  or  tell  lies.  There  is  not  an  assessment  roll 
now  made  out  in  this  state  that  does  not  both  tell  and  work 
lies."3  As  long  as  this  is  true,  boards  of  equalization  are 
of  little  avail. 

Utah,  Washington,  Wisconsin  and  Wyoming.  In  some  states  the  boards  of 
equalization  have  to  deal  only  with  the  assessment  of  corporate  property. 
So  in  Alabama,  Colorado  and  Maryland.  County  boards  of  equalization  exist 
in  most  of  the  states,  even  when  state  boards  are  unknown. 

1  "The  strife  between  counties  to  reduce  assessments  has  not  ceased  and 
in  all  probability  will  not,  as  long  as  assessors  are  elected,  or  selfishness  be 
a  passion  in  the  human  breast."     Report  of  the  California  State  Board  of 
Equalization,  1885  and  1886,  p.  4. 

2  "No  board  of  officials,  however  diligent  or  however  conversant  they 
may  be  with  the  subject,  can  make  an  equalization  which  to  themselves  will 
be  absolutely  satisfactory."   Annual  Report  of  State  Assessors  of  New  York, 
1887,  p.  ii.     From  ocean  to  ocean  the  same  complaint  is  found. 

3  M.  I.  Townsend,  in  Proceedings  and  Debates  of  the  Constitutional  Con- 
vention of  New  York,  1867-68,  iii.,  p.  1945.     Cf.  the  first  Report  of  the  (New 
York)  Commissioners  to  revise  the  Laws  for  the  Assessment  and  Collection 
of  Taxes,  1871,  p.  33. 


THE  GENERAL  PROPERTY  TAX  27 

2.  Lack  of  universality,  or  failure  to  reach  personal 
property.  This  defect  although  the  most  flagrant,  per- 
haps requires  the  least  comment;  for  it  is  so  patent  that 
it  has  become  a  mere  byword  throughout  the  land.  Per- 
sonal property  nowhere  bears  its  just  proportion  of  the 
burdens  ;  and  it  is  precisely  in  those  localities  where  its 
extent  and  importance  are  the  greatest  that  its  assessment 
is  the  least.  The  taxation  of  personal  property  is  in  inverse 
ratio  to  its  quantity ;  the  more  it  increases,  the  less  it 
pays.  The  reason  is  plain.  So  far  as  it  is  intangible,  per- 
sonal property  escapes  the  scrutiny  of  the  most  vigilant 
assessor  ;  so  far  as  it  is  tangible,  it  is  purposely  exempted  in 
its  chief  form,  as  stock  in  trade,  in  our  commercial  centres. 
In  the  mad  race  for  wealth  it  is  considered  dangerous  for  the 
local  assessors  in  large  cities  to  list  the  merchant's  capital, 
with  the  possible  result  of  driving  it  away  to  localities  more 
favored  by  their  financial  officers.  It  is  scarcely  necessary 
to  give  figures  to  substantiate  these  statements;  but  a  few 
facts,  taken  from  the  official  documents,  national,  state  and 
municipal,  may  be  of  interest. 

The  tenth  census  of  the  United  States  asserts  that  from 
1860  to  1880  the  assessed  valuation  of  real  estate  increased 
from  6,973  millions  of  dollars  to  13,036  millions,  while  that 
of  personal  property  decreased  from  5,111  to  3,866  millions. 
In  1890  the  assessed  valuation  of  real  estate  had  grown  to 
18,956,  while  that  of  personal  property  was  6,516  millions, — 
less  than  the  figures  of  thirty  years  before.  In  California  per- 
sonal property  was  assessed  in  1872  at  220  millions  of  dollars, 
in  1880  at  174  millions,  and  in  1887  at  164  millions,  — a  net 
decrease  in  fifteen  years  of  56  millions.  Real  estate  increased 
during  the  same  period  from  417  to  791  millions.  Personal 
property  paid  17.31  per  cent,  real  estate  82.69  per  cent  of  the 
taxes.  By  1893,  although  the  assessed  value  of  real  estate 
was  1000  millions,  that  of  personalty  was  only  173  millions. 
In  Illinois  in  1882  personal  property  paid  22.01  per  cent 
of  the  taxes,  in  1894  only  17.26  per  cent.  In  Cook  County 
(including  Chicago),  personal  property  paid  only  14  per  cent; 


28  ESSAYS  IN  TAXATION 

in  Kankakee  County,  only  11  per  cent.  In  Iowa,  while  the 
real  estate  valuation  in  1893  increased  over  that  of  the  pre- 
ceding year  by  32  million  dollars,  the  assessed  valuation  of 
personal  property  actually  decreased.  In  New  York  the 
figures  are  as  follows  : 

REAL  ESTATE.  PERSONAL  PROPERTY. 

1843 9    476,999,000  $118,602,000 

1859 1,097,564,000  307,349,000 

1871 1,599,930,000  452,607,000 

1878 2,373,418,000  364,960,000 

1888 3,122,588,000  346,611,000 

1893 3,626,645,000  411,413,000 

The  proportion  paid  by  personal  property  has  decreased 
steadily  almost  every  year,  until  according  to  the  last  figures 
it  pays  but  9.99  per  cent  of  the  state  taxation,  as  against 
90.01  per  cent  falling  on  real  estate.  In  twenty-five  years 
the  valuation  of  real  estate  has  increased  $2,000,000,000 ; 
that  of  personalty  has  diminished  about  $40,000,000.  In  the 
District  of  Columbia  the  valuation  was  in  1878  :  realty  83 
millions,  personalty  IT  millions ;  in  1894  realty  had  increased 
to  160  millions,  personalty  had  decreased  to  11  millions.  In 
New  Jersey,  in  1887,  in  one  township  the  real  estate  was 
assessed  at  $272,232,  the  personal  property  at  $591;  in 
another  the  figures  were  $2,274,900  and  $47,150  respec- 
tively. In  New  York  the  personalty  was  returned  in  one 
town  at  $5000,  in  the  adjoining  but  no  more  prosperous 
town  at  $700,000.  Perhaps  the  most  remarkable  figures 
are  found  in  the  large  cities.  In  Cincinnati  the  valuation 
in  1866  was:  realty,  $66,454,602;  personalty,  $67,218,101. 
In  1892  the  realty  had  increased  to  $144,208,810  ;  the  per- 
sonalty had  decreased  to  $44,735,670.  In  Monroe  county, 
New  York,  in  which  the  city  of  Rochester  is  situated,  the 
realty  was  assessed  in  1892  at  $132,202,478  ;  the  personalty 
at  $8,408,803.  Finally,  in  the  city  of  Brooklyn  in  1893  real 
estate  was  assessed  at  $486,497,186,  while  personalty  was 
valued  at  $19,123,170.  Personal  property,  in  other  words, 
paid  a  little  more  than  three  per  cent  of  the  whole  tax  on 


THE  GENERAL  PROPERTY  TAX  29 

property.     In  1895  the  proportion  fell  still  lower,  —  to  one 
and  twenty-three  hundredths  per  cent. 

These  striking  figures  become  ridiculous  when  it  is  re- 
membered that  in  our  modern  civilization  the  value  of  per- 
sonal property  far  exceeds  that  of  real  estate,  as  understood 
by  the  taxing  power.  It  is  true  that  the  legal  distinction 
between  real  and  personal  property  fluctuates  in  the  various 
commonwealths ;  but  in  the  eyes  of  the  assessors  real  estate 
generally  includes  only  land  and  the  fixtures  thereto,  all  the 
other  forms  of  wealth  being  regarded  as  personal  property. 
In  California,  indeed,  the  constitution  of  1879  provides  that 
mortgages  of  real  estate  shall  be  regarded  and  taxed  as  realty. 
This  is  true  also  in  Massachusetts.  But  even  if  mortgages 
were  counted  as  real  estate,  and  even  if  (as  is  nowhere  done) 
other  certificates  of  ownership  in  realty  were  also  counted  as 
real  estate,  it  would  still  remain  true  that  personal  property 
constitutes  the  greater  part  of  the  national  wealth.  For  per- 
sonal property  does  not  denote  merely  movable  objects.  It 
includes  money,  public  obligations  and  the  vast  mass  of 
intangible  property  represented  by  securities  of  corporations, 
of  which  only  a  small  portion  are  certificates  of  ownership 
in  realty.  Above  all,  personal  property  includes  the  entire 
and  ever-increasing  annual  products  of  agriculture  and  in- 
dustry — the  gigantic  mass  of  modern  wealth  devoted  mainly 
to  consumption,  but  existing  as  the  stock  in  trade  of  indi- 
viduals. Even  in  our  western  commonwealths,  where  the 
communities  are  still  mainly  agricultural,  it  is  an  acknowl- 
edged fact  that  the  personalty  exceeds  the  realty.  The 
auditor  of  Washington  tells  us  that,  if  a  true  valuation  could 
be  reached,  it  is  "  clear  and  incontestable  that  the  wealth  of 
the  territory  in  personal  property,  for  the  purposes  of  taxa- 
tion, would  largely  predominate  over  that  of  real  estate." 1 
And  if  this  is  true  of  the  far  West,  how  much  greater  must 
be  the  relative  proportion  of  personalty  in  the  busy  marts 

1  Report  of  the  Territorial  Auditor  to  the  Legislative  Assembly,  1887,  p. 
94.  Cf.  Biennial  Report  of  the  Auditor  of  Iowa,  1881,  p.  8,  and  that  of  the 
Comptroller  of  Idaho,  1887-88,  p.  74,  to  the  same  effect. 


of  the  East.1  Yet  the  more  differentiated  the  industry  and 
the  more  predominant  the  personalty,  the  less  does  the  latter 
contribute  to  the  public  charges  ;  until  in  the  foremost  state 
of  the  Union  realty  pays  more  than  nine-tenths  and  per- 
sonalty less  than  one-tenth ;  while  in  its  second  largest  city 
realty  pays  ninety-nine  hundredths  and  personalty  only  one 
hundredth  of  the  tax. 

The  taxation  of  personal  property,  therefore,  is  in  inverse 
ratio  to  its  quantity.  The  more  it  increases,  the  less  it  pays. 
The  general  property  tax  thus  sins  against  the  principle  of 
universality  of  taxation  even  more  than  against  the  principle 
of  uniformity.  In  the  middle  ages  whole  classes  were  exempt 
by  express  provision  of  the  law ;  in  our  time  and  country 
whole  classes  are  exempt  by  the  inevitable  working  of  the 
law.  It  is  the  law  which  is  equally  at  fault  in  both  cases. 

3.  Incentive  to  dishonesty.  One  of  the  worst  features  of 
the  general  property  tax  is  that  any  attempt  to  enforce  the 
taxation  of  personalty  by  more  rigid  methods  results  in 
evasion  and  deception.  The  property  tax  necessarily  leads 
to  dishonesty,  and  this  for  two  reasons.  In  the  first  place, 
under  our  system,  whole  classes  of  personalty  are  exempt 
from  state  taxation.  The  most  familiar  examples  are  im- 
ported merchandise  in  the  original  package ;  United  States 
bonds,  notes,  checks  and  certificates ;  property  in  transitu; 
goods  produced  in  another  state  sent  on  commission ;  deposits 
in  savings  banks,  etc.  The  temptation  for  the  taxpayer  to 
convert  his  property  temporarily  into  these  classes  is  gener- 
ally irresistible.  Not  only  does  the  law  hold  out  to  individ- 
uals inducements  to  practise  fraud,  but  it  sustains  them  in 
its  commission.2  Secondly,  wherever  any  pretence  is  made 

1  Of.  New  York  State  Assessors'  Report,  1880,  and  Comptroller's  Report, 
1889,  p.  33 :    "I  am  sure  that  the  actual  value  of  the  personal  property 
legally  liable  to  taxation  exceeds  that  of  the  real  estate." 

2  In  People  ex  rel.  Ryan,  88  N.  Y.  142,  the  Court  of  Appeals  held  that  the 
assessors  were  bound  by  a  transaction  which  the  court  itself  declared  to  be 
"  a  device  to  escape  taxation."     In  1892,  however,  a  law  was  passed  in  New 
York  requiring  applicants  for  reduction  of  assessment  to  make  oath  that  they 
had  not  incurred  debts  for  the  purpose  of  avoiding  taxation. 


THE  GENERAL  PROPERTY  TAX  31 

of  enforcing  the  tax  on  personalty,  and  especially  where  the 
taxpayers  are  required  to  fill  out  under  oath  detailed  blanks 
covering  every  item  of  their  property,  the  inducements  to 
perjury  are  increased  so  greatly  as  to  make  its  practice 
universal.  The  honest  taxpayer  would  willingly  bear  his 
fair  share  of  the  burden;  but  even  he  cannot  concede  his 
obligation  to  pay  other  men's  taxes.  The  only  result  of 
more  rigid  execution  of  the  law  is  a  more  systematic  and 
widespread  system  of  deception.  Official  documents  tell  us 
that  "  instead  of  being  a  tax  upon  personal  property,  it  has 
in  effect  become  a  tax  upon  ignorance  and  honesty.  That  is 
to  say,  its  imposition  is  restricted  to  those  who  are  not 
informed  of  the  means  of  evasion,  or,  knowing  the  means, 
are  restricted  by  a  nice  sense  of  honor  from  resorting  to 
them."1  The  tax  commission  of  New  Hampshire  declares 
that  "  the  mere  failure  to  enforce  the  tax  is  of  no  importance, 
in  itself  considered,  in  comparison  with  the  mischief  wrought 
in  the  corrupting  and  demoralizing  influences  of  such  legis- 
lation."2 The  Illinois  commission  asserts  that  the  system  is 
"  debauching  to  the  conscience  and  subversive  of  the  public 
morals  —  a  school  for  perjury,  promoted  by  law."3  The 
Connecticut  commission  maintains  that  the  resulting  "  de- 
moralization of  the  public  conscience  is  an  evil  of  the  greatest 
magnitude."4  A  late  New  York  report  states  that  "it 
puts  a  premium  on  perjury  and  a  penalty  on  integrity."6 
The  Ohio  commission  tells  us  that  "  it  results  in  debauch- 
ing the  moral  sense  and  is  a  school  of  perjury,  imposing 
unjust  burdens  on  the  man  who  is  scrupulously  honest."6 
The  recent  Cleveland  commission  says  that  "  the  existing 
system  is  productive  of  the  gravest  injustice ;  under  its 

1  Report  of  the  Commissioners  of  Taxes  and  Assessments  in  the  City  of 
New  York,  1872,  p.  9. 

2  Report  to  the  Legislature  by  Hon.  George  Y.  Sawyer,  1876,  p.  16. 
8  Report  of  the  Revenue  Commission,  1886,  p.  8. 

4  Report  of  the  Special  Commission  on  Taxation,  1887,  p.  27.     C/.  the 
New  Jersey  Tax  Commission  Report,  1880,  p.  11. 

6  Report  of  Counsel  to  revise  the  Tax  Laws  of  New  York,  1893,  p.  12. 
6  Report  of  the  Tax  Commission  of  Ohio,  1893,  p.  22. 


32  ESSAYS  IN  TAXATION- 

sanction,  grievous  wrongs  are  inflicted  upon  those  least  able 
to  bear  them  ;  these  laws  are  made  the  cover  and  excuse  for 
the  grossest  oppression  and  injustice  ;  above  all  and  beyond 
all,  they  produce  in  the  community  a  widespread  demorali- 
zation;  they  induce  perjury;  they  invite  concealment.  The 
present  system  is  a  school  of  evasion  and  dishonesty.  The 
attempt  to  enforce  these  laws  is  utterly  idle."1  The  West 
Virginia  commission  tells  us  that  "  the  payment  of  the  tax 
on  personalty  is  almost  as  voluntary  and  is  considered  pretty 
much  in  the  same  light  as  donations  to  the  neighborhood 
church  or  Sunday-school."  2  And  almost  every  annual  report 
of  the  state  comptrollers  and  assessors  complains  bitterly 
that  the  assessment  of  personalty  is  nothing  but  an  incentive 
to  perjury.3 

4.  Regressivity.  Taxes  are  progressive  when  their  increase 
is  more  than  proportional  to  the  increase  of  the  property  or 
income  taxed,  i.e.  when  the  rate  itself  increases  with  the  in- 
crease of  the  property.  Taxes  are  regressive  when  the  rate 
increases  as  the  property  or  income  decreases.  The  general 
property  tax  in  its  practical  effects  is  often  regressive,  since  the 
tax  on  personalty  is  levied  virtually  only  on  those  who  already 
stand  on  the  assessor's  book  as  liable  to  the  tax  on  realty. 
y-  Those  who  own  no  real  estate  are  in  most  cases  not  taxed  at 
all ;  those  who  possess  realty  bear  the  taxes  for  both.  The 
weight  of  taxation  really  rests  on  the  farmer,  because  in  the 
rural  districts  the  assessors  add  the  personalty,  which  is  gen- 
erally visible  and  tangible,  to  the  realty,  and  impose  the  tax 
on  both.  We  hear  a  great  deal  about  the  decline  of  farming 
land.  But  one  of  its  chief  causes  has  been  singularly  over- 
looked. It  is  the  overburdening  of  the  agriculturist  by  the 
general  property  tax.  What  is  practically  a  real  property  tax 
in  the  remainder  of  the  state  becomes  a  general  property  tax 
in  the  rural  regions.  The  farmer  bears  not  only  his  share, 

1  Report  of  the  Special  Committee  on  Taxation  of  the  Cleveland  Chamber 
of  Commerce,  1895,  p.  10. 

2  Preliminary  JReport  of  the  Tax  Commission,  1884,  p.  10. 

8  Cf.  Report  of  California  Board  of  Equalization,  1885-86,  p.  6. 


THE  GENERAL  PROPERTY  TAX  33 

but  also  that  of  the  other  classes  of  society.  Thus  official 
documents  tell  us  that  "  the  class  of  property  that  escapes 
taxation  most  is  the  class  of  property  that  pays  the  largest 
dividends."1  And  in  general  it  may  be  said,  with  our  state 
auditors,  that  "  the  property  of  the  small  owner,  as  a  rule,  is 
valued  by  a  far  higher  standard  than  that  of  his  wealthy 
neighbor."2  Or,  as  it  is  put  by  others:  "In  every  portion 
of  the  state  we  find  the  most  unproductive  property,  and  that 
of  the  lowest  real  value,  assessed  at  the  highest  ratio.  The 
rule  holds  good  that  those  who  have  to  battle  hardest  with 
life  for  subsistence,  are  compelled  to  pay  the  most  onerous 
taxes  on  the  real  value  of  their  property."3 

It  is  no  wonder  that  in  their  desperation  the  small  farmers 
should  cry  out  for  the  equal  enforcement  of  the  laws  taxing 
personalty ;  it  is  no  wonder  that  they  should  attempt  to  stem 
the  current  in  ignorance  of  the  impossibility  of  the  task. 
They  have  forgotten  Walpole's  saying,  that  it  is  safer  to  tax 
real  than  personal  estate,  because  "  landed  gentlemen  are  like 
the  flocks  upon  their  plains,  who  suffer  themselves  to  be 
shorn  without  resistance ;  whereas  the  trading  part  of  the 
nation  resemble  the  boar,  who  will  not  suffer  a  bristle  to  be 
pluckt  from  his  back  without  making  the  whole  parish  to 
echo  with  his  complaints."4 

5.  Double  Taxation.  Double  taxation,  as  we  shall  see  later 
on,  is  of  various  kinds.  But  there  is  one  form  which  is  par- 
ticularly applicable  to  the  property  tax,  namely  that  of  debt 
exemption.  This  is  perhaps  the  greatest  weakness  of  the 
general  property  tax,  and  the  one  which  has  given  rise  to 
the  most  interminable  discussion. 

On  the  one  hand  it  is  maintained  that  an  offset  should  be 
made  for  all  indebtedness,  whether  mortgage  debts  on  real 
property  or  general  liabilities  on  personalty.  Individuals 

1  Biennial  Eeport  of  the  Auditor  of  Iowa,  1880-81,  p.  6. 

2  Biennial  Eeport  of  the  Auditor  of  Kentucky,  1887,  p.  iv. 

*  Eeport  of  the  State  Assessors  of  New  York,  1873,  p.  9.     Cf.  West  Vir- 
ginia Tax  Commission,  Preliminary  Eeport,  1884,  p.  8 ;  Eeport  of  the  Comp- 
troller of  Tennessee,  1888,  p.  16. 

*  Cf.  Sinclair,  History  of  the  Public  Eevenue,  vol.  iii.,  appendix,  p.  79. 


34  ESSAYS  IN  TAXATION 

should  be  taxed  on  what  they  own,  not  on  what  they  owe. 
To  tax  both  borrower  and  lender  is  double  taxation.  This 
is  the  view  of  the  Connecticut  commission,1  and  the  practice 
of  most  of  the  states  accords  with  it.  On  the  other  hand,  the 
majority  of  American  investigators  assert  that  deduction  for 
indebtedness  results  practically  in  such  injustice  and  decep- 
tion as  to  be  utterly  unendurable.  They  therefore  demand 
that  there  shall  be  no  offset  of  debts  against  property. 
This  is  the  view  of  the  Massachusetts  and  New  Jersey  com- 
missions,2 and  the  practice  in  some  states  like  Pennsylvania, 
Georgia,  Kentucky,  Louisiana,  Maryland  and  Missouri. 

Both  these  views  are  correct.  To  tax  both  lender  and 
borrower  for  the  same  property  is  plainly  double  taxation, 
and  therefore  unjust.  The  fallacy  of  the  contrary  opinion 
consists  in  looking  at  the  property  rather  than  at  the  owner. 
What  the  state  desires  to  reach  is  primarily  the  individual. 
It  taxes  his  property  simply  because  it  considers  this  a  test 
of  his  ability  to  pay.  But  his  ability  is  manifestly  reduced 
pro  tanto  by  his  debts.  His  true  taxable  property  therefore 
§  consists  in  his  surplus  above  indebtedness.  Otherwise  one 
would  be  taxed  for  what  he  has,  and  another  for  what  he  has 
not.  As  it  has  been  well  put,  what  we  want  to  tax  is  ability, 
not  liability.  This  is  the  view  accepted  by  all  European 
authorities.3  The  only  American  scientist  who  holds  to  the 
contrary  opinion,  Amasa  Walker,  does  so  in  a  half-hearted 
way ;  for  he  bases  his  view  on  utterly  arbitrary  data,  con- 
fesses that  much  hardship  will  ensue,  and  finally  concludes 
that  the  income-tax  principle  is  the  only  just  one.*  To  tax 
both  property  and  credits,  both  lender  and  borrower,  is 
plainly  incorrect  in  principle  and  inequitable  in  practice. 

On  the  other  hand  it  is  equally  true  that  deduction  for 
debts  is  thoroughly  pernicious  in  its  operation.  It  is  the 

1  Report  of  the  Commission  of  1887,  p.  26. 

2  Massachusetts  Commission,  1875,  pp.  95-98 ;   New  Jersey  Commission, 
1880,  p.  20;  Commission  0/1891,  Preliminary  Report,  p.  10. 

8  Roscher,  Finanzwissenschaft,  p.  336;  Wagner,  Finanzwissenschaft,  ii., 
p.  432. 

«  A.  Walker,  Science  of  Wealth  (7th  edition),  p.  339. 


THE  GENERAL  PROPERTY  TAX  35 

universal  testimony  that  no  portion  of  the  tax  laws  offers 
more  temptations  to  fraud  and  perjury  than  this  system  of 
offsets.  The  creation  of  fictitious  debts  is  a  paying  invest- 
ment. In  the  states  where  such  deductions  are  permitted, 
attempts  to  obtain  immunity  from  taxation  in  this  way  are 
widespread  and  generally  successful.  And  they  are  most  suc- 
cessful in  the  case  of  property  which  already  bears  less  than 
its  share  of  the  burdens.  The  great  majority  of  officials 
cry  out  against  debt-exemption  as  an  utter  abomination.1 

Both  methods  are  thus  unendurable.  Debt-exemption 
and  no  debt-exemption  are  equally  bad.  The  states  shift 
from  one  policy  to  the  other  in  equal  despair.  We  are 
therefore  forced  to  the  conclusion  that  the  whole  system 
is  unsound.  The  fault  lies  not  in  the  exemption,  but  in 
the  taxation,  of  property.  The  general  property  tax  under 
either  of  these  two  methods  produces  crying  injustice.  As 
there  is  no  third  method  possible,  the  inference  is  that  the 
injustice  is  of  the  essence  of  the  general  property  tax. 
The  New  York  commission,  indeed,  came  to  the  con- 
clusion that  mortgage  debts  should  be  deducted  from 
realty,  but  that  there  should  be  no  offset  for  debt  in 
the  assessment  of  personalty.2  This  would  be  a  legal  dis- 
crimination wholly  subversive  of  the  first  principles  of 
justice.  As  a  matter  of  fact,  just  the  contrary  principle 
prevails  at  present  in  New  York  and  Connecticut ;  debts  are 
there  deductible  only  from  personalty.  There  is  no  logical 
escape  from  one  of  the  two  methods,  debt-taxation  or  debt- 
exemption  ;  and  under  either  plan  the  general  property  tax 
stands  convicted  by  the  test  of  experience. 

Under  a  system,  indeed,  where  there  is  no  general  prop- 
erty tax,  but  simply  a  tax  on  real  estate,  the  question  of 
taxing  mortgages  assumes  a  different  aspect  and  must  be 
decided  independently.  As  that  problem  is  discussed  else- 

1  Report  of  the  Commissioners  of  Assessment  and  Taxation  in  Oregon, 
1886,  p.  9. 

2  First  Report,  1871,  pp.  60-69,  71-79.     Cf.  the  sharp  criticism  in  the 
Massachusetts  Tax  Commissioners'  Report,  1875,  p.  96. 


36 

where  in  this  volume,1  it  may  be  omitted  here.  But  as  soon 
as  we  have  the  general  property  tax  and  exempt  mortgage 
debts  on  real  estate,  the  exemption  must  consistently  be 
accorded  to  all  debts.  And  we  are  then  immediately  con- 
fronted by  the  dilemma  just  discussed. 

If  we  sum  up  all  these  inherent  defects,  it  will  be  no 
exaggeration  to  say  that  the  general  property  tax  in  the 
United  States  is  a  dismal  failure.  No  language  can  be 
stronger  than  that  found  in  the  reports  of  the  officials 
charged  with  the  duty  of  assessing  and  collecting  the  tax. 
Whole  pages  might  be  filled  with  such  testimony  from  the 
various  states.  Only  the  following  extracts  from  the  New 
York  reports  are  given,  as  samples  : 

A  more  unequal,  unjust  and  partial  system  for  taxation  could 
not  well  be  devised.2 

The  defects  of  our  system  are  too  glaring  and  operate  too 
oppressively  to  be  longer  tolerated.8 

The  burdens  are  so  heavy  and  the  inequalities  so  gross,  as 
almost  to  paralyze  and  dishearten  the  people.4 

The  absolute  inefficiency  of  the  old  and  rickety  statutes  passed 
in  a  bygone  generation  [is  patent  to  all].5 

The  hope  of  obtaining  satisfactory  results  from  the  present 
broken,  shattered,  leaky  laws  is  vain.6 

The  system  is  a  farce,  sham,  humbug.7 

The  present  result  is  a  travesty  upon  our  taxing  system,  which, 
aims  to  be  equal  and  just.8 

[The  general  property  tax  is]  a  reproach  to  the  state,  an  outrage 
upon  the  people,  a  disgrace  to  the  civilization  of  the  nineteenth 
century,  and  worthy  only  of  an  age  of  mental  and  moral  darkness 
and  degradation,  when  the  "  only  equal  rights  were  those  of  the 
equal  robber."9 

1  Infra,  chap,  iv.,  sec.  i. 

2  First  Annual  Report  of  the  State  Assessors,  1860,  p.  12. 

8  Comptroller's  Report,  1859.  *  Assessors'  Report,  1873,  p.  3. 

8  Assessors'  Report,  1877,  p.  5. 

6  Report  of  Commmissioners  of  Taxes  and  Assessments,  1876,  p.  52. 

7  Assessors'  Report,  1879,  p.  23. 

8  Comptroller's  Report,  1889,  p.  34.  9  Assessors'  Report,  1879,  p.  7. 


THE  GENERAL  PROPERTY  TAX  37 

| 

After  such  self-criticism  nothing  more  need  be  said.  In 
comparison  with  this,  the  view  of  the  European  scientists 
is  moderate,  that  "  a  cruder  instrumentality  of  taxation  has 
rarely  been  devised."  1  And  yet,  notwithstanding  all  this 
criticism,  our  methods  limp  along  almost  unchanged. 

II.  History  of  the  Property  Tax. 

In  the  previous  chapter  we  have  learned  how  direct  taxation 
begins,  and  have  seen  that  the  primitive  form  is  the  land  tax 
or  tax  on  real  estate.  We  also  noticed  the  process  by  which 
the  original  mass  of  property  is  gradually  broken  up,  and 
personal  property  slowly  assumes  a  greater  importance  in 
the  wealth  of  the  community.  Let  us  study  a  little  more 
in  detail  the  subsequent  history. 

The  monarch,  or  public  opinion  as  reflected  in  the  govern- 
ment, seeks  to  conform  the  practice  of  taxation  to  this  change 
in  economic  facts.  The  property  tax  continues,  but  the  as- 
sessor tries  to  make  the  tax  equable  by  including  not  only  the 
realty,  but  also  all  these  new  forms  of  personalty,  whether 
corporeal  or  incorporeal.  The  original  land  tax  is  supple- 
mented by  other  taxes,  or  expanded  into  a  general  property 
tax.  The  attempt  is  intelligible  and  even  laudable  ;  for  it 
is  simply  the  manifestation  of  the  ideas  of  equality  and  uni- 
versality of  taxation.  Personal  property  must  not  escape ; 
ergo,  it  must  be  included  in  the  designation  of  general  prop- 
erty and  taxed  equally  with  the  real  property. 

The  attempt  is  laudable,  but  it  is  futile.  Personalty  will 
evade  the  most  inquisitorial  assessor.  Wherever  tried,  the 
general  property  tax  again  resolves  itself  into  the  real  prop- 
erty tax.  History  shows  us  that  this  has  always  been  the 
case.  The  more  complex  the  industrial  development,  the  more 
inevitably  does  this  process  take  place  and  the  more  surely 
does  the  general  property  tax  virtually  revert  to  its  primi- 
tive form  of  real  property  tax.  Not  alone  history,  but  theory, 

1  Leroy-Beaulieu,  Science  des'Finances  (5me  6d.)»  iii.,  p.  498 :  "  Rarement, 
dans  la  fiscalitfi  moderne,  on  a  invent^  d'instrument  plus  grossier." 


38  ESSAYS  IN"  TAXATION 

m 

shows  us  that  this  must  be  so.  For  the  general  property  tax, 
as  we  have  seen,  originated  with  and  is  calculated  for  an 
economic  system  where  the  only  property  is  the  collective, 
indivisible  property,  where  the  landowner  and  capitalist  are 
one.  There  is  one  kind  of  property,  and  therefore  one  kind 
of  property  tax.  But  as  soon  as  property  is  split  up  into 
different  parts,  as  soon  as  there  are  various  kinds  of  property, 
just  so  soon  does  the  single  property  tax  become  antiquated 
and  useless.  It  is  not  only  useless,  but  it  is  now  absolutely 
iniquitous.  For  the  attempt  to  include  under  one  head  the 
gains  flowing  from  widely  different  pursuits  —  pursuits 
whose  number  and  divergence  are  limited  only  by  the  well- 
nigh  boundless  variety  of  individual  capacity  — ,  this  attempt 
to  reduce  the  multiform  to  the  uniform  can  end  only  in  the 
virtual  exemption  of  the  new  forms  and  a  consequent  over- 
burdening of  the  old.  What  has  been  conceived  in  the 
spirit  of  justice  develops  into  an  embodiment  of  injustice. 
What  has  been  in  its  origin  an  attempt  to  attain  equality 
results  in  gross  inequality. 

Because  of  the  evident  impracticability  of  the  general 
property  tax,  governments  now  begin  to  fit  their  theories  of 
taxation  to  the  economic  facts.  They  abandon  the  attempt 
to  make  the  new  facts  conform  to  the  old  theories.  As  vari- 
ous forms  of  personalty  gradually  set  themselves  free  from 
taxation,  the  state  reasserts  the  principle  of  equality.  But 
it  now  recognizes  the  existing  facts  and  abandons  the  fiction 
of  the  general  collective  property.  As  property  splits  up 
into  its  various  elements,  new  taxes  are  laid,  one  by  one,  not 
on  the  property  but  on  the  separate  sources  of  this  new  wealth. 
The  old  land  tax  may  be  retained,  but  other  taxes  are  imposed 
in  various  forms.  Taxes  on  vocations,  on  professions,  on 
trade,  on  commerce,  on  profits,  on  interest,  on  wages  and 
salaries,  follow  in  quick  succession,  until  finally  the  theories 
and  practice  of  taxation  are  in  harmony  with  actual  condi- 
tions. One  by  one  these  various  sources  of  wealth  drop 
off  from  the  antiquated  general  pr.operty  tax  only  to  receive 
a  new  life  in  these  fresh  forms.  The  feeling  of  equity  in 


THE  GENERAL  PROPERTY  TAX  39 

the  public  consciousness  cannot  be  put  down.  What  escapes 
under  one  form  it  attempts  to  reach  under  another.  Fiscal 
theory  cannot  long  lag  behind  the  facts  of  industrial  life. 

Let  us  test  the  truth  of  these  statements  by  an  appeal  to 
history.  Let  us  trace,  in  other  words,  the  actual  develop- 
ment of  the  general  property  tax.1 

In  antiquity  direct  taxation  was  treated  as  an  extraordi- 
nary source  of  revenue.  The  Athenian  direct  tax  (etV^opa), 
as  levied  in  the  time  of  Solon  (B.C.  596),  was  nominally  a 
classified  property  tax,  but  in  reality  a  land  tax.2  With  the 
increase  of  wealth  an  attempt  was  soon  made  to  reach  per- 
sonalty ;  but  its  success  is  entirely  conjectural.  We  simply 
know  that  under  Nausinicus  (B.C.  380)  the  bases  of  taxation 
were  not  only  land  and  houses,  but  also  slaves,  cattle,  furni- 
ture and  money.  It  has  been  claimed,  however,  that  the 
tax  had  by  that  time  become  a  progressive  income  tax.3  At 
all  events  there  is  no  proof  that  the  tax  on  intangible  per- 
sonal property  as  such  was  at  all  successful. 

In  Rome  the  direct  tax  (tributum  cimwrn),  which  was  some- 
times even  treated  as  a  forced  loan  to  be  repaid  out  of  the 
proceeds  of  conquest,  was  levied  only  to  meet  extraordinary 
expenses  for  which  the  proceeds  of  domains  (the  veetigalia) 
did  not  suffice.  As  Rome  was  at  first  an  agricultural  com- 
munity, the  real  "  quiritarian  "  property  alone  recognized  by 
law  consisted  solely  of  land  and  the  capital  affixed  to  land, 
like  houses,  slaves  and  cattle.  These  were  the  res  mancipi.* 
But  the  property  tax  was  assessed  only  on  the  land,  on  the 

1  The  only  attempt  thus  far  made  to  discuss  this  subject  is  that  of  Parieu, 
Histoire  des  Impots  Generaux  sur  la  Propriete  et  le  Bevenu  (1856).  But 
this  is  inexact,  inadequate,  unclear  and  antiquated. 

a  Boeckh,  Public  Economy  of  the  Athenians,  book  iv.,  chap.  5. 

8  This  is  claimed  by  Kodbertus,  in  Hildebrand's  Jahrbucher,  viii.,  pp.  453 
et  seq.  For  the  other  view  see  the  complicated  interpretation  of  Boeckh 
(p.  669  of  the  American  edition). 

4  "  Mancipi  res  sunt  praedia  in  Italico  solo,  tarn  rustica,  qualis  est  fundus, 
quam  urbana,  qualis  domus ;  item  jura  praediorum  rusticorum,  velut  via, 
iter,  actus,  aquaeductus ;  item  servi  et  quadrupedes,  quae  dorso  collove  do- 
mantur,  velut  boves,  muli,  equi,  asini.  Ceterae  res  nee  mancipi  sunt." 
Ulpian,  19,  1.  Cf.  Gaius,  i.,  p.  120 ;  ii.,  pp.  15-17. 


40  ESSAYS  IN  TAXATION 

assumption  that  every  acre  of  land  would  require  a  definite 
quantity  of  this  productive  capital.1  The  early  Roman 
property  tax  was  therefore  in  effect  a  tax  on  realty,  analog- 
ous to  the  early  el<r<j)opd.2  With  the  development  of  trade 
and  industry  in  the  later  days  of  the  republic,  the  character 
of  property  underwent  a  change.  The  amount  of  personalty 
increased.  If  the  tributum  was  to  remain  a  general  property 
tax,  it  would  be  necessary  to  assess  also  these  new  forms 
of  property.  And,  in  truth,  the  attempt  was  made.  Not 
only  farming  implements,  but  ships,  carriages,  money,  gar- 
ments, ornaments,  etc.,  were  listed.3  But  it  must  be  remem- 
bered that  the  only  personalty  assessed  still  consisted  of 
visible,  tangible  objects,  although  the  censors  had  practically 
unlimited  power  to  take  up  any  property  into  the  tax-list 
(census}.  There  is  no  evidence  to  prove  that  trading  capital 
proper  was  at  all  taxed.4  And  it  is  useless  to  speculate  what 
might  have  been  the  result  during  the  last  period  of  the 
republic ;  for  further  progress  in  this  direction  was  checked 
by  the  fact  that,  with  one  isolated  exception,  the  republic 
levied  no  direct  property  tax  at  all  on  the  Roman  citizens 
after  167  B.C.  Whether  the  tributum  civium  was  again  em- 
ployed during  the  empire  is  a  moot  question.  The  weightier 
arguments  seem  to  be  on  the  side  of  those  who  maintain 
that  it  was  never  again  made  use  of  in  its  old  form.5 
In  the  provinces  the  property  tax  was  nothing  but  a  land 

1  Marquardt,  Romische  Staatsverwaltung  (2d  edition),  ii.,  p.  166. 

2  Except  that  it  was  not  a  graduated  tax,  and  was  levied  on  the  market 
value,  not  the  produce. 

8  Matthias,  Romische  Grundsteuer  und  Vectigalrecht,  1882,  p.  6.  The  lead- 
ing ideas  of  Matthias  are  translated  in  Humbert,  Essai  sur  les  Finances  chez 
les  Romains,  ii.,  pp.  328  et  seq. 

4  The  only  one  who  maintains  the  contrary  is  Walter,  Geschichte  des 
romischen  Rechts  (3d  edition)  L,  p.  271.  But  the  passage  of  Livy  to  which 
he  refers  (vi.,  27)  does  not  bear  out  his  assertion.  Walter  stands  quite 
alone. 

6  Rodbertus,  Hildebrand's  Jahrbiicher,  iv.,  pp.  408-427,  and  Hegewisch, 
Romische  Finanzen,  p.  1346,  maintain  its  existence.  But  Savigny,  Ver- 
mischte  Schriften,  ii.,  pp.  151,  185  ;  Huschke,  Ueber  den  Census  zur  Zeit 
Christi,  pp.  70,  190;  Mommsen,  Romische  Geschichte,  ii.,  p.  387;  and  Mar- 


THE  GENERAL  PROPERTY  TAX  41 

tax  —  either  a  tax  on  the  value  (tributum  soli},  or  a  tithe 
(decuma),  or  a  ground  rent  (vectigal  cerium  or  stipendium) . 
In  addition  to  the  land  tax  proper  we  find  the  poll  tax  (tri- 
butum capitis}  which,  in  some  of  the  older  provinces  where 
the  remains  of  an  enterprising  commercial  life  still  existed, 
probably  included  a  tax  on  classes  or  professions  or  a  nominal 
general  property  tax.1 

The  Roman  property  tax  was  therefore  virtually  a  tax  on 
land  and  the  little  productive  capital  affixed  to  land.  Per- 
sonalty, so  far  as  it  was  assessed  at  all,  consisted  of  the 
meagre  tangible  objects  owned  by  an  agricultural  people. 
The  Romans  had  a  general  property  tax  because,  as  in 
Greece,  there  was  only  one  kind  of  property  —  the  collective 
property  owned  by  slave-holding  landed  proprietors. 

Under  the  empire  industrial  society  began  to  differentiate. 
Caligula  (A.D.  37-41)  took  advantage  of  this  to  levy  taxes 
on  special  classes,  above  all  on  carriers,  prostitutes  and 
pimps.2  Trading  capital,  everywhere  the  first  element  to 
separate  itself  from  the  collective  mass  of  property,  was 
reached  for  the  first  time  by  Vespasian  (69-79)  in  the  curi- 
ous tax  on  the  private  owners  of  city  urinals  and  closets.3 
Finally,  shortly  before  Caracalla  (211-217)  we  find  a  general 
tax  on  commercial  capital,  known  henceforth  as  aurum  nego- 
tiatorium.  But  what  a  singular  commentary  it  is  on  the 
progress  of  civilization  that  the  first  tax  on  circulating 

quardt,  Eomische  Staatsverwaltung,  ii.,  p.  171,  take  the  opposite  view. 
Dureau  de  la  Malle,  in  his  Economic  Politique  des  Eomains,  does  not  touch 
this  point.  The  decisive  quotation  is  that  from  Tacitus,  Annales,  13,  61,  of 
which  Rodbertus'  interpretation  is  strained.  The  best  argument  —  which 
has  not  hitherto  been  advanced  —  seems  to  be  this:  that  if  the  tributum 
civile  had  continued,  it  would  not  have  been  necessary  for  Diocletian  to 
introduce  into  Italy  the  tributum  provinciate. 

1  Rodbertus,  iv.,  p.  364,  puts  it  too  strongly  when  he  says  that  it  was  only 
a  poll  tax.     See  Marquardt,  op.  cit. ,  ii. ,  p.  195. 

2  Suetonius,  Caligula,  40 :  "Ex  gerulorum  diurnis  quaestibus  pars  octava, 
ex  capturis  prostitutarum  quantum  quaeque  uno  concubitu  mereret."     Cf. 
Dio  Cassius,  lix.,  28. 

8  Known  as/oricam.  Suetonius,  Vespasian,  16,  23.  Cf.  for  other  author- 
ities Walter,  Rechtsgeschichte,  i.,  p.  498. 


42  ESS  AYS  IN  TAXATION 

capital  should  be  on  a  rather  degrading  occupation,  and  the 
first  tax  on  industry  one  on  prostitutes.1  Caracalla,  we  are 
told,  conferred  the  privilege  of  Roman  citizenship  upon  all 
the  inhabitants  of  the  empire  in  order  to  extend  to  them  the 
now  numerous  direct  taxes,  especially  the  succession  and 
manumission  taxes.2  The  provincial  land  tax  continued; 
but  it  went  through  the  same  evolution  as  the  civic  direct 
tax  and  became  a  general  property  tax. 

The  industrial  development,  however,  had  outrun  fiscal 
theory.  It  became  more  and  more  difficult  to  reach  person- 
alty. More  and  more  barbarous  methods  were  introduced  ; 3 
until,  as  Lactantius  tells  us  in  stirring  language,  torture 
was  applied  to  the  recalcitrant  owner.4  Under  Diocletian 
the  provincial  land  tax  (known  henceforth  as  jugatio  or 
capitatio  terrend)  was  introduced  into  Italy.  But  at  the 
time  of  the  Theodosian  code  and  the  completion  of  the 
late  fiscal  system,  we  find,  not  the  general  property  tax,5 
but  a  vast  variety  of  taxes,  indirect  and  direct.  Chief 
among  the  latter  were  those  on  the  profits  of  trades,  pro- 
fessions and  artisans,6  now  consolidated  into  corporations 
through  the  petrifaction  of  industrial  relations.7  But  the 
attempt  to  tax  personal  property  by  means  of  a  general 

1  Hildebrand's  Jahrbucker,  v,,  p.  315. 

2  At  least  this  is  the  uncharitable  construction  of  the  act  by  Dio  Cassius. 
8  The  municipal  decurions,  for  example,  were  made  personally  liable  for 

the  taxes  levied  on  their  municipalities.  Service  as  decurion  became  compul- 
sory and  hereditary.  Fugitive  decurions  were  brought  back,  like  fugitive 
serfs  or  military  deserters. 

*  De  morte  pers.  23 :  Fora  omnia  gregibus  familiarium  referta ;  unusquis- 
que  cum  liberis,  cum  servis  aderat ;  tormenta  ac  verbera  personabant ;  filii 
adversus  parentes  suspendebantur ;  fidelissimi  quique  servi  contra  dominos 
vexabantur,  uxores  adversus  maritos.  Si  omnia  defecerunt,  ipse  contra  se 
torquebantur,  et  quum  dolor  vicerat,  adscribebantur  quae  non  habebantur. 

8  The  poll  tax  (capitatio  plebeia  or  Tmmana)  levied  on  the  serfs  (coloni) 
was  practically  a  property  tax  because  it  was  paid  by  the  landowner. 

6  Known  as  chrysargyrum,  vectigal  artium,  pensio  auraria,  and  aurum 
lustrale.     Cf.  Levasseur,  Histoire  des  Classes  Ouvrieres  en  France,  i.,  pp. 
72-78. 

7  Cf.  Wm.  Adams  Brown,  "  State  Control  of  Industry  in  the  Fourth  Cen- 
tury," Political  Science  Quarterly,  ii.,  1887,  pp.  494-613. 


THE  GENERAL  PROPERTY  TAX  43 

property  tax  was  abandoned  because  the  original  mass  of 
property  had  disintegrated.  The  primitive  system  was 
abolished,  and  was  replaced  by  methods  more  or  less  analog- 
ous to  those  employed  in  modern  Europe. 

During  the  middle  ages  the  same  development  can  be  no- 
ticed. In  the  early  period,  after  the  disruption  of  the  Roman 
empire,  there  were  no  taxes  at  all.  The  primitive  Teutonic 
idea  forced  its  way  into  the  feudal  system,  and  the  con- 
tributions originally  devoted  to  public  purposes  became  the 
private  possessions  of  feudal  nobles  and  over-lords.  The 
public  tax  became  private  property.1 

In  the  early  feudal  system  land  was  practically  the  only 
form  of  wealth,  just  as  it  was  the  basis  of  the  political  fabric. 
In  England  the  feudal  payments  (scutages,  carucages  and 
tallages~)  were  assessed  on  the  land,  just  as  the  Saxon  ship- 
geld  and  danegeld  were  land  taxes.  These  were  at  first 
levied  on  the  gross  produce  of  the  land,  either  actual  or 
as  computed  by  the  mere  quantity  of  the  land.  With  the 
progress  of  cultivation  net  produce  rather  than  gross  produce 
was  made  the  test.  Rents  became  the  only  practicable 
test  of  the  value  of  land.  But  from  the  twelfth  century 
onward,  the  growth  of  industry  and  commerce  in  the  towns 
led  to  such  an  increase  of  personalty  or  movables  that  it 
became  necessary  to  devise  some  new  method  of  reaching 
the  ability  of  the  citizens.  The  only  way  out  of  the  diffi- 
culty in  England,  as  on  the  whole  continent,  was  a  combina- 
tion of  the  taxes  on  lands  and  on  movables  through  the 
general  property  tax. 

The  mediaeval  town  was  the  birthplace  of  modern  taxa- 
tion. Every  inhabitant  was  compelled  to  bear  his  share  of 
the  local  burdens,  his  proportion  of  the  scot  and  the  lot. 
The  scot,  or  tax,  was  almost  from  the  very  outset  the  general 
property  tax  combined  with  the  subordinate  poll  tax,  exactly 

1  Cf.  for  details  Clamageran,  Histoire  de  Vlmpot  en  France,  i.,  p.  115  j 
and  Vuitry,  Etudes  sur  le  Regime  Financier  de  la  France  avant  la  Revolution, 
i.,  p.  420. 


44  ESSAYS  IN  TAXATION 

as  in  the  earliest  days  of  the  New  England  colonies.  The 
town,  as  such,  generally  paid  its  share  of  the  national  bur- 
dens in  a  lump  sum,  the  firma  burgi.  But  this  lump  sum 
was  always  distributed  among  the  townsmen  in  proportion 
to  the  property  of  each.1  On  the  continent  it  was  the  same. 
In  the  German  towns  the  taxes  were  at  first  levied  only  on 
land.  But  at  the  close  of  the  twelfth  century,  the  land  tax 
had  already  been  merged  into  the  general  property  tax  —  or, 
as  it  was  called,  the  tax  on  property  in  possessionibus,  agris, 
domibus,  censibus  et  rebus  quibuscunque?  In  some  towns  it 
was  called  simply  a  tax  of  so  much  per  posse  or  pro  bonorum 
facultate?  Most  of  the  German  towns  by  this  time  com- 
bined the  general  property  tax  with  the  poll  tax,*  and  in  the 
Swiss  cantons  the  tax  was  even  called  the  Hob-,  Grut-,  und 
Kopfsteuer.5  The  only  distinction  between  England  and  the 
continent  was  that  in  England  the  property  tax  remained  for 
centuries  the  sole  local  tax,  while  in  France  and  Germany 
local  excises  or  octrois  were  soon  added.  But  for  some  time 
at  least  the  general  property  tax  was  the  measure  of  the 
individual's  capacity. 

The  general  state  taxes  followed  in  the  wake  of  the  munic- 
ipal taxes.  Already  in  1166  a  tax  on  movables  was  levied 
throughout  almost  all  Europe  in  order  to  aid  the  crusaders.6 

1  Numerous  examples  may  be  found  in  Madox,  Firma  Burgi,  pp.  281  et 
seq.     In  one  town,  under  Edward  III.,  each  man  is  "  taxandus  et  assidendus 
juxta  quantitatem  bonorum  et  catallorum  suorum  ibidem."     In  another  town 
the  tax  "  debet  assideri  proportionaliter  juxta  quantitatem  bonorum  suorum." 
For  London,  where  each  freeman  paid  the  general  property  tax  as  partem 
de  bonis  suis  or  partem  catallorum,  see  the  examples  in  Munimenta  Gild- 
hallae  Londoniensis,  Liber  Albus,  i.,  p.  592  et  seq.    For  full  details  as  to 
the  method  of  assessment  tempore  Edward  II.,  see  Liber  Custumarum,  pp. 
193  et  seq.,  568  et  seq. 

2  Zeumer,  Die  deutschen  Stadtesteuern  .  .  .  im  xii.  und  xiii.  Jahrhundert, 
pp.  86-89. 

8  Christian  Meyer,  Augsburger  Stadtbuch,  pp.  75,  313. 
*  Schonberg,  Finanzverhaltnisse  der  Stadt  Basel  im  xiv.  und  xv.  Jahrhun- 
dert,  p.  134. 

5  Blumer,  Staats-  und  Sechtsgeschichte  der  schweizerischen  Democratien, 
ii,  pp.  295  et  seq. 

6  Sinclair,  History  of  the  Public  Revenue,  i.,  p.  88. 


THE  GENERAL  PROPERTY  TAX  45 

But  the  first  general  property  tax,  into  which  all  the  older 
contributions  from  the  land  soon  merged,  was  the  Saladin 
tithe  of  1188  on  the  occasion  of  the  third  crusade.  In 
England  from  this  time  on,  the  grants  of  rents  and  movables 
(de  redditibus  et  mobilibus,  or,  as  they  were  sometimes  called, 
de  redditibus  et  catallis)  became  more  and  more  common 
until  they  finally  superseded  the  older  methods  of  securing 
revenue.  The  fractional  parts  of  the  property  granted 
varied  from  a  fortieth  to  a  fourth,  but  from  1290  it  became 
customary  to  tax  the  nobility  and  the  clergy  only  two-thirds 
as  much  as  the  commons.  In  1334  the  proportion  was  fixed 
as  the  fifteenth  and  the  tenth.  Since  the  land  was  owned 
chiefly  by  the  nobles,  this  meant  a  higher  nominal  rate  for 
movables.  But  in  reality  there  was  a  substantial  equality 
because  the  assessment  of  chattels  was  not  strictly  enforced. 
This  is  apparent  from  the  dissatisfaction  shown  with  the  tax 
of  1275,  when  the  people  were  assessed  ad  unguem,  i.e.  up 
to  the  full  value  of  their  movables.1  In  the  succeeding 
grants  the  old  easy  practice  was  resumed.  As  the  tax  on 
lands,  however,  could  be  levied  on  actual  rents,  it  was  not 
apt  to  be  so  leniently  assessed.  Thus  a  substantial  equality 
was  probably  reached. 

Just  as  in  England  the  tallages  merged  into  the  fifteenths 
and  tenths,  so  in  France  the  feudal  charges  on  the  land 
developed  into  the  general  property  tax,  which  however  still 
retained  the  old  name  taille.  The  ordinances  of  1254—56 
attempted  to  regulate  the  assessment,  and  provided  that 
movables  should  be  charged  only  half  as  much  as  immova- 
bles.2 France  thus  endeavored  to  attain  by  law  what 
England  effected  by  custom.  During  the  fourteenth  century 
the  taille  came  to  be  the  chief  direct  tax,  and  in  1439  it  was 
made  a  permanent  annual  tax.  In  Germany,  also,  the  imperial 
and  state  direct  taxes,  in  so  far  as  there  were  any,  took  the 
form  of  general  property  taxes.  The  Bedep  the  gemeiner 

1  Dowell,  History  of  Taxation  and  Taxes  in  England  (2d  edition),  i.,  p.  68. 

2  Clamageran,  Histoire  de  VImpot  en  France,  i.,  p.  264. 

8  At  first  a  feudal  land  payment ;  cf.  Htillmann,  Deutsche  Finanzgeschichte 
des  Mittelalters,  p.  133. 


46  ESSAYS  IN  TAXATION 

Pfennig,1  the  Landschoss,2  the  Landsteuer?  etc.,  all  followed 
the  example  of  the  local  property  tax. 

In  the  Italian  republics  the  commonwealth  was  at  first 
supported  by  the  general  property  tax.  In  Milan,  under 
the  name  stima  e  catastro  de  bent,  it  is  found  as  early  as  1208, 
and  afterwards  was  levied  with  such  severity  that  the  assess- 
ment book  was  known  as  the  libra  del  dolor  e.*  In  Genoa  it 
was  called  colletta.5  In  Florence  it  was  known  as  estimo  and 
played  an  important  role  in  politics.6  And  finally  we  find 
in  the  Netherlands  from  the  earliest  times  the  general  prop- 
erty tax  known  as  the  schot  or  the  tenth,  etc.,  on  bezittungen 
(possessions).7 

The  general  property  tax  thus  existed  throughout  all 
Europe.  It  was  moderately  successful  because  well  suited 
to  the  period.  Although  involving  an  inquisitorial  search 
into  every  article  of  the  scanty  mediaeval  stock,  as  can  readily 
be  seen  from  the  detailed  schedules  of  assessments  still  in 
existence,  the  tax  was  levied  chiefly  on  tangible,  physical 
objects  not  capable  of  easy  concealment.  With  the  exception 
of  countries  like  France,  where  the  tax  was  emasculated  by 
the  system  of  exemptions,  it  resulted  on  the  whole,  during 
this  early  period  of  society,  in  a  tax  fairly  proportional  to  the 
individual  faculty.  There  was  a  general  property  tax 
because  there  was  a  very  slight  differentiation  of  property. 

Before  long  a  change  set  in.     In  England  the  fifteenths 

1  Lang,  Historische  Entwickelung  der  teutschen  Steuerverfassungen  seit  der 
Karolinger,  p.  182. 

2  Schmoller,  "Die  Epochen  der  preussischen  Finanzpolitik,"  in  Jahrbuch 
fur  Gesetzgebung,  Verwaltung  und  Volkswirtschaft,  i.,  pp.  35,  42. 

8  Hoffmann,  Geschichte  der  direkten  Steuern  in  Baiern  com  Ende  des  xiii. 
Jahrhunderts,  pp.  11,  17,  39. 

*  Carli,  Eelazione  del  Censimento  dello  Stato  di  Milano,  in  Custodi's  (Serif 
tori  Classici  Italiani,  parte  moderna,  xiv.,  pp.  184,  185. 

6  "  Le  imposte  straordinarie  si  possono  di  questa  epoca  [1252]  compren- 
dere  in  una  sola,  la  colletta."  Canale,  Storia  dei  Genovesi,  i.,  p.  318  (edition 
of  1844). 

6  Villani  tells  us  that  it  was  levied  on  "  cio  che  chiascuno  havea  di  stabile 
e  di  mobile  e  di  guadagno."     Istorie  Florentine  fino  al  anno  1348,  book  x., 
chap.  17  (vol.  vi.,  p.  26,  of  Milan  edition  of  1803). 

7  Engels,  De  Geschiedenis  der  Selastingen  in  Nederland,  pp.  60-65. 


THE  GENERAL  PROPERTY  TAX  47 

and  tenths  were  changed  from  percentagevto  apportioned 
taxes,  and  every  locality  had  to  raise  a  definite  lump  sum. 
But  the  old  methods  of  assessment  fell  into  disuse.  Each 
town  and  county  made  its  own  arrangements  and  treated 
personal  property  with  such  leniency  that  the  total  product 
of  the  tenth  and  the  fifteenth  continually  decreased.  This 
resulted  in  attempts  on  the  part  of  the  crown  to  supplement 
the  old  tax  by  a  new  general  property  tax,  called  the  sub- 
sidy. The  early  efforts  met  with  failure,  but  finally,  in 
1514,  the  first  general  subsidy  was  granted,  as  a  tax  of  six- 
pence in  every  pound  of  property.  The  pound  rate  was 
afterwards  fixed  at  four  shillings  on  lands,  and  two  shillings 
eight  pence  on  goods.  But  the  subsidy  went  through  precisely 
the  same  development  as  the  fifteenth  and  the  tenth.  At  first 
really  a  percentage  tax,  it  was  soon  practically  converted  into 
an  apportioned  tax  of  a  stated  lump  sum.  No  re-assessment  of 
the  districts  took  place ;  each  locality  was  supposed  to  pay 
the  same  sum  year  after  year.  All  increase  in  wealth  was 
thus  entirely  omitted  from  the  lists.  Exemption  after  exemp- 
tion was  made,  and  personal  property  was  so  loosely  assessed 
that  the  total  yield  continually  declined.  The  most  arbitrary 
methods  were  employed.  Only  the  old  "  subsidy-men  "  were 
taxed  ;  allowances  were  made  in  a  multitude  of  cases  ;  and 
the  assessments  of  personalty  were  so  low  and  partial  that 
the  subsidy  became  a  perfect  farce.  As  Bacon  said,  "the 
Englishman  is  master  of  his  own  valuation."1  Sir  Robert 
Cecil  stated  in  1592  that  there  were  not  over  five  men  in 
London  assessed  on  their  goods  at  £200  ;  and  Sir  Walter 
Raleigh  wrote  in  1601  that  "  the  poor  man  pays  as  much  as 
the  rich."  2  Although  nominally  a  general  property  tax,  the 
subsidy  thus  came  to  be  levied  chiefly  on  the  land,  and 
became  an  unequal  land  tax  —  so  unequal  that  it  finally 
disappeared  in  1663. 

Under  the  commonwealth  an  attempt  was  made  to  revive 
the  general  property  tax,  under  the  name  of  commonwealth 

1  And,  he  adds,  "  the  least  bitten  in  purse  of  any  nation  in  Europe." 

2  Report  on  Public  Income  and  Expenditure,  1869,  ii.,  p.  415. 


48  ESSAYS  /W  TAXATION- 

monthly  assessments.1  The  improvement  was  so  marked 
that  the  old  subsidies  were  completely  abandoned  and 
replaced  by  the  assessments.  But  the  reform  was  short-lived 
and  the  assessments  of  personal  property  continually  dimin- 
ished. Sir  William  Petty,  after  complaining  of  this,  never- 
theless held,  as  do  some  of  our  rural  legislators  to-day,  that 
"  assessments  upon  personal  estates,  if  given  in  as  elsewhere 
upon  oath,  would  bring  that  branch  which  of  itself  is  most 
dark  to  a  sufficient  clearness."2  After  the  Revolution  the 
tax  was  levied  as  the  so-called  property  tax.  By  its  terms  3 
it  was  assessed  on  the  persons  possessed  of  personal  property, 
real  estate,  or  public  offices  or  positions  of  profit.  And  it 
was  at  first  a  percentage  tax.  But  the  yield  decreased  so 
enormously  that  Parliament  in  1697  fixed  the  sum  a  rate 
should  produce,  i.e.  it  became  an  apportioned  tax  of  stated 
amount.  Moreover,  the  difficulty  of  assessing  personalty  and 
the  impossibility  of  reaching  intangible  property  were  now  so 
apparent  that  the  tax  became  almost  exclusively  a  land  tax, 
and  was  first  so  called  in  1697.  The  "annual  land  tax" 
of  England  (which  since  1798  has  become  simply  a  redeem- 
able rent  charge  on  land)  was  thus  intended  to  be  a 
general  property  tax  and  for  a  long  time  continued  to  be  so 
legally.4  The  provision  taxing  personal  property  continued 
to  exist  on  the  statute  book  until  1833,  and  the  clause  taxing 
public  offices  and  positions  of  profit  was  not  finally  repealed 
until  1867.  The  year  before  its  repeal  it  had  yielded  the 
sum  of  £823!5  Such  was  the  ludicrous  result  of  the 
attempt  to  maintain  mediaeval  customs.  The  general  prop- 
erty tax,  which  had  started  out  as  a  land  tax,  reverted  in 
name  as  well  as  in  fact  to  its  earliest  form. 

1  Tayler,  The  History  of  the  Taxation  of  England,  p.  21. 

2  Petty,  Verbum  Sapienti ;  or  ...  the  Method  of  raising  Taxes  in  the 
most  equal  manner,  p.  17.     (Appended  to  his  Political  Anatomy  of  Ireland, 
edition  of  1691.)  *  4  William  III.,  chap.  1. 

*  Adam  Smith,  Wealth  of  Nations,  book  v.,  chap.  ii. :  "  By  what  is  called 
the  land  tax,  it  was  intended  that  stock  should  be  taxed  in  the  same  propor- 
tion as  land."  (Thorold  Rogers1  edition,  ii.,  p.  553.) 

5  Report  of  the  Commissioners  of  Inland  Revenue,  1867. 


THE  GENERAL  PROPERTY  TAX  49 

In  other  countries  the  history  of  the  property  tax  is 
identical.  In  France  the  taille  was  of  two  kinds:  the  taille 
reelle,  which  was  levied  only  on  lands  in  the  pays  cCttat;  and 
the  taille  personnelle,  nominally  a  general  property  tax 
levied  in  the  pays  Selection,  which  constituted  the  greater 
portion  of  France.  In  reality  the  taille  personnelle  was 
assessed  only  on  the  families  or  households  of  the  non- 
nobles  (roturiers},  and  it  became  practically  a  land  tax  like 
the  taille  r6elle  ;  for  the  wealthy  owners  of  personalty  soon 
acquired  the  same  privileges  as  the  nobility.  Vauban  tells 
us  that  the  taille  as  a  tax  on  movables  was  assessed  only 
on  the  poorest  classes.1  Sully,  indeed,  endeavoured  in  1660 
to  restore  the  principles  of  the  general  property  tax  and  to 
assess  personalty  as  well  as  realty.2  But  he  failed  ignobly ; 
for,  at  the  close  of  the  seventeenth  century,  the  great  work 
of  Boisguillebert  is  full  of  bitter  complaint  and  lamentation.3 
And  when  the  attempt  was  made  in  the  eighteenth  century 
to  supplement  the  taille  by  the  dixiemes  and  vingtiemes,  like 
the  tenths  or  fifteenths  of  old  in  England,  the  new  tax  again 
soon  became  virtually  a  land  tax.4  The  development  was 
inevitable,  and  it  resulted  during  the  Revolution  in  the  total 
abolition  of  the  general  property  taxes. 

In  Germany,  the  mediaeval  assessment  lists  to  be  filled 
out  by  the  taxpayer  bear  a  striking  resemblance  to  those 

1  "  En  resume  la  taille  etait  un  impot  territorial  qui  n'atteignoit  que  les 
proprietaires  les  plus  pauvres  du  royaume,  et  une  taxe  mobiliere  qui  portait 
exclusivement  sur  les  classes  les  moins  riches  de  la  socidte."     Dime  Royale, 
p.  32  of  Daire's  edition. 

2  Sully  ordered  the  officials  to  assess  contributors  "  a  raison  de  leurs  fac- 
ult^s,  quelque  part  qu'elles  soient,  meubles  ou  immeubles,  heritages  nobles 
ou  roturiers,  trafic  et  industrie."     Cf.  Clamageran,  Histoire  de  Vlmpot,  ii., 
p.  359. 

8  "  II  n'y  a  pas  le  tiers  de  la  France  qui  y  contribue,  n'y  ayant  que  les  plus 
faibles,  et  les  plus  raiserables ;  en  sorte  qu'elles  les  ruinent  absolument."  Le 
Detail  de  la  France,  chap.  iii. 

4  "Dans  la  pratique,  1' element  foncier  pr4dominait  presque  exclusive- 
ment." Stourm,  Les  Finances  de  Vancien  Regime  et  de  la  Revolution,  i.,  p. 
240.  See  also  Necker,  De  V Administration  des  Finances  de  la  France,  i., 
p.  159.  It  must  be  noted,  however,  that  these  taxes  were  calculated  on  the 
basis  of  income,  rather  than  of  selling  value. 


60  ESS  Ays  IN  TAXATION 

still  used  in  some  of  the  American  commonwealths.1  But 
there,  as  here,  it  became  continually  more  difficult  to  reach 
personal  property.  In  Prussia  (Brandenburg)  this  was 
true  already  at  an  early  period.2  In  Bavaria  as  well  as  in 
Austria  the  nobility  and  the  richer  commercial  class  suc- 
ceeded at  the  end  of  the  sixteenth  century  in  shoving  the 
main  burdens  on  the  shoulders  of  the  rural  population.3 
And  in  the  other  German  states  the  equal  property  tax 
remained  so  only  in  name.4  In  Switzerland,  indeed,  the 
property  tax,  like  so  many  other  mediaeval  customs,  has 
been  in  part  retained  to  this  day.  But  its  nature  has 
been  materially  changed,  in  that  it  has  become  a  progressive 
tax  and  that  an  attempt  has  been  made  to  remedy  its  defects 
by  joining  to  it  an  income  tax.  Even  thus,  much  hardship 
and  inequality  ensue.5 

In  Italy  the  development  of  the  property  tax  can  be 
clearly  studied  in  Florentine  history.  The  estimo,  at  first 
assessed  with  comparative  equality,  soon  became  honey- 
combed with  abuses.  Personalty  slipped  out  of  the  lists, 
the  rich  bankers  entirely  escaped,  and  the  whole  load  of 
taxation  fell  with  crushing  force  on  the  small  owners, 
populo  minuto.  Hundreds  were  completely  ruined  and  com- 
pelled to  seek  refuge  in  exile.6  The  discontent  became  so 
loud  that  after  threats  of  revolution  and  disorder  the 
estimo  was  finally  supplanted  in  1427  by  the  new  tax, 
catasto,  to  be  levied  on  the  personalty  of  traders  and 

1  For  atypical  list  of  1531,  see  Bielfeld,  Geschichte  des  magdeburgisehen 
Steuerwesens  von  der  Reformationszeit,  pp.  19-23. 

2  Schmoller,  "Die  Epochen  der  preussischen  Finanzpolitik,"  in  his  Jahr- 
buch,  i.,  pp.  42,  49.    Cf.  his  "  Studien  iiber  die  wirthschaftliche  Politik  Fried- 
richs  des  Grossen,"  in  the  Jahrbuch,  viii.,  p.  38,  for  Brandenburg;  viii.,  p. 
1011,  x.,  p.  330,  and  x.,  p.  350,  for  Magdeburg. 

8  Hoffmann,  Geschichte  der  directen  Steuern  in  Baiern,  p.  70. 

*  Wagner,  Finanzwissenschaft,  iii.  (1st  edition),  pp.  62,  77,  80. 

6  Cf.  the  article  by  Conn  in  Political  Science  Quarterly,  iv.,  p.  50. 

6  Cf.  Leon  Say,  Les  Solutions  Democratiques  de  la  Question  des  Impots,  i., 
pp.  209  et  seq.,  especially  pp.  222,  229.  He  gives  no  references.  For  a  full 
history,  see  Baer,  "7Z  Catasto  Fiorentino  nel  secolo  xv.",  Nuova  Antologia, 
vol.  17  (1871)  and  the  book  of  Canestrini  quoted  in  the  next  note  but  one. 


THE  GENERAL  PROPERTY  TAX  51 

bankers  as  well  as  on  realty.  Machiavelli  gives  us  an 
interesting  account  of  the  opposition  of  the  nobles,  who 
were  at  the  same  time  the  great  financiers.1  But  the  new 
general  property  tax  went  the  way  of  its  predecessors. 
When  we  read  of  the  subterfuges  and  evasions,  of  the 
strenuous  efforts  on  the  part  of  the  state  to  compel 
the  listing  of  personalty  and  of  the  dismal  failure  of 
the  attempts,  we  seem  to  be  reading  the  reports  of 
American  commonwealth  assessors  or  comptrollers  for  1895. 
Their  experience  was  precisely  the  same  as  ours.  In  1431 
only  fifty-two  persons  paid  the  tax  on  trade  capital,  although 
the  amount  of  such  capital  must  have  been  immense.  And 
in  1495  the  tax  was  made  in  name,  what  it  had  long  been 
in  fact,2  —  a  tax  on  immovables  only.  Personalty,  as  such, 
was  henceforth  legally  exempt.  The  general  property  tax 
had  again  become  a  land  tax. 

Throughout  all  Europe  the  local  property  tax  has  become 
a  tax  on  real  estate.  In  England  the  whole  system  of  local 
taxation  is  based  on  the  poor  rate,  according  to  the  statute 
of  1601  which  mentioned  as  liable  to  the  tax  not  only 
occupiers  of  lands,  houses,  etc.,  but  every  inhabitant,  par- 
son and  vicar.  The  tax  was  a  general  property  tax  levied 
according  to  the  ability  of  the  individual,  ad  statum  et 
facilitates,  as  the  courts  put  it.  At  first  land  was  assessed, 
as  everywhere  else  at  the  beginning,  simply  according  to 
the  number  of  acres  ;  but  by  the  time  of  William  III., 
rental  value  was  substituted  for  mere  quantity  as  the  test 
of  ability.  Since  personal  property  also  was  taxable,  this 
was,  however,  simply  a  general  property  tax.  Yet  from 
an  early  period  the  rule  was  adopted  that  all  personal 
property  liable  must  be  local,  visible  and  productive  of  a 
profit.3  Thus  intangible  personalty,  tangible  personalty 

1  History  of  Florence,  iv.,  p.  14  (vol.  i.,  p.  181  of  Detmold's  translation). 

2  Canestrini,  La  Scienza  e  VArte  di  Stato.     L'lmposta  sulla  Richezza 
Mobile  ed  Immobile  (1867),  i.,  pp.  108,  115,  321,  etc. 

8  In  1633  it  was  decided  that  "the  assessments  are  to  be  according  to  the 
visible  estates,  real  and  personal,  of  the  inhabitants."  Sir  Anthony  Earby's 
Case,  2  Bulstrode,  354. 


52  ESSAYS  IN  TAXATION 

kept  in  the  owner's  hands,  earnings  from  personal  abilities, 
and  profits  from  moneys  invested  or  lent  at  interest  in 
another  parish  were  exempt  as  being  either  unproductive, 
invisible,  or  not  possessing  a  local  situs.1  The  only  prop- 
erty not  excluded  by  these  conditions  was  stock  in  trade, 
but  it  was  not  until  the  industrial  revolution  toward  the 
close  of  the  eighteenth  century  that  the  matter  became  of 
importance.  Lord  Mansfield  in  1775  showed  the  impolicy 
of  such  action ; 2  but  although  the  liability  of  stock  in  trade 
was  hotly  disputed,  it  was  affirmed  by  Lord  Kenyon  in 
1795. 3  The  results  were  doubly  disastrous  in  the  places 
where  it  was  tried :  the  early  success  of  the  experiment  led 
the  justices  of  the  peace  to  begin  that  improvident  method 
of  poor  relief  known  as  the  allowance  system  ;*  and  the  prac- 
tice of  rating  stock  in  trade,  which  was  confined  to  the  old 
clothing  district  in  the  south  and  west  of  England,  resulted 
in  the  rapid  decline  of  the  ancient  staple  industry  and  a 
transfer  of  the  business  to  Yorkshire,  where  personalty 
was  not  assessed.5  When  the  principle  was  tested  in 
another  district  in  1839,  the  courts  again  upheld  the  prac- 
tice.6 As  a  consequence,  a  law  was  passed  which  exempted 
personalty  from  taxation,7  but  it  was  powerless  to  bring 
the  trade  back  to  its  old  channels.  The  exempting  law 

1  Report  of  the  Poor  Law  Commissioners  on  Local  Taxation,  1843,  8vo 
edition  (1844),  pp.  43  et  seq.,  and  especially  pp.  34-38.  This  contains  the 
best  history  of  local  taxation  in  Great  Britain. 

3  Rex  vs.  Ringwood,  1  Cowp.  326. 

8  Rex  vs.  Mast,  1  Bott.  204.  For  a  detailed  statement  of  the  case  see 
Appendix  A  to  the  Report  of  the  Poor  Law  Commissioners  on  Local  Taxa- 
tion, 1843,  nos.  35-94.  The  existence  of  the  general  property  tax  can  still  be 
seen  in  1791.  Cf.  Rex  vs.  White,  4  T.  R.  771. 

*  By  the  Speenhamland  Act  of  1795.  See  First  Annual  Report  of  the 
Poor  Law  Commissioners,  1835,  p.  207. 

6  Report  of  the  Poor  Law  Commissioners  on  Local  Taxation,  1843,  8vo 
edition,  p.  38. 

6  Queen  vs.  Lumsdaine,  10  Adol.  and  Ellis,  157. 

7  3  and  4  Viet.,  chap.  89,  provided  that  it  should  not  be  lawful  "to  tax 
any  inhabitant  in  respect  of  his  ability  derived  from  profits  of  stock  in  trade 
or  any  other  property,"  except  "  lands,  houses,  tithes  iinpropriate,  propria- 
tions  of  tithes,  coal  mines,  or  saleable  underwoods." 


THE  GENERAL  PROPERTY  TAX  53 

was  enacted  for  only  a  year,  but  it  has  been  annually 
renewed  ever  since.1  Thus  for  the  last  half  century 
the  local  property  tax  in  England  has  been  legally 
as  well  as  actually  a  tax  on  productive  real  estate 
alone.2 

History  thus  everywhere  teaches  the  same  lesson.  As 
soon  as  the  idea  of  direct  taxation  has  forced  itself  into 
recognition,  it  assumes  the  practical  shape  of  the  land  tax. 
This  soon  develops  into  the  general  property  tax  which  long 
remains  the  index  of  ability  to  pay.  But  as  soon  as  the 
mass  of  property  splits  up,  the  property  tax  becomes  an 
anachronism.  The  various  kinds  of  personalty  escape,  until 
finally  the  general  property  tax  completes  the  cycle  of  its 
development  and  reverts  to  its  original  form  of  the  real 
property  tax.  The  property  tax  in  the  United  States  is 
simply  one  instance  of  this  universal  tendency;  it  is  not 
an  American  invention,  but  a  relic  of  medievalism.  In 
substance,  although  not  in  name,  it  has  gone  through  every 
phase  of  the  development,  and  any  attempt  to  escape  the 
shocking  evils  of  the  present  by  making  it  a  general  prop- 
erty tax  in  fact  as  well  as  in  name  is  foredoomed  to  failure. 
The  general  property  tax  is  impossible  in  any  complicated 
social  organism.  Mediaeval  methods  cannot  succeed  amid 
modern  facts. 


1  By  the  Expiring  Laws  Continuance  Act. 

2  Thorold  Rogers,  Local  Taxation,  especially  in  English  Cities  and  Towns, 
p.  16.     Cf.  also  Noble,  Local  Taxation,  p.  58 ;  Palgrave,  Local  Taxation  in 
Great  Britain,  p.  78  ;  Goschen,  Reports  and  Speeches  on  Local  Taxation,  p. 
50 ;  Phillips,  "Local  Taxation  in  England  and  Wales,"  in  Probyn's  Local  Gov- 
ernment and  Taxation  in  the  United  Kingdom,  p.  502  ;  Bilinski,  Die  Gemein- 
debesteuerung  und  deren  Reform,  pp.  35  et  seq.    See  also  Hedley,  Observations 
on  the  Incidence  of  Local  Taxation  (1884),  who  opposes  the  exemption  of 
stock  in  trade  and  the  recent  attempts  to  get  machinery  exempted  from  rat- 
ability.    Cf.  G.  II.  Blunden,  Local  Taxation  and  Finance,  1895.    Some  inter- 
esting material  may  also  be  found  in  J.  J.  O'Meara,  Municipal  Taxation  at 
Home  and  Abroad,  1894.    The  best  works  on  the  legal  aspect  of  the  question 
are  Castle,  A  Practical  Treatise  on  the  Law  of  Rating  (2d  edition,  1886), 
and  Boyle  and  Davies,   The  Principles  of  Rating  practically  considered, 
1890. 


64  ESSAYS  IN  TAXATION 

III.    Theory  of  the  Property  Tax. 

While  it  is  generally  confessed  that  the  property  tax,  as 
administered  in  the  United  States,  is  a  failure,  it  is  some- 
times contended  that  if  thoroughly  executed  it  would  be  a 
just  tax.1  The  theory  of  the  general  property  tax,  as  set 
forth  in  almost  all  our  state  constitutions,  is  held  to  be  cor- 
rect in  principle.  Is  this  true  ? 

In  the  first  place  we  must  disabuse  ourselves  of  the  idea 
that  property,  as  such,  owes  any  duty  to  pay  taxes.  The 
state  has  direct  relations  not  with  property,  but  with  per- 
sons. It  is  the  individual  who,  from  the  very  fact  of  his 
existence  within  the  state,  is  under  definite  obligations 
toward  the  state,  of  which  the  very  first  is  to  protect  and  sup- 
port it.  The  state,  indeed,  can  exist  without  the  particular 
individual,  but  the  individual  cannot  exist  without  the  state. 
Every  civilized  community  professes  to  tax  the  individual 
according  to  his  ability  to  pay,  which  may,  indeed,  be  meas- 
ured by  his  property  or  by  any  other  standard.  In  the  last 
instance,  however,  it  is  the  individual  who  really  owes  this 
duty. 

But  is  property  the  true  test  of  ability?  In  primitive 
communities  it  is  to  a  certain  extent.  Every  freeman  is  a 
proprietor,  and  all  are  supported  by  the  produce  of  the  land. 
Comparative  equality  of  wealth  gives  comparative  equality 
of  opportunity,  and  the  finer  differences  in  ability  to  pay 
are  not  yet  recognized.  In  the  early  stages  of  society 
property  is  indeed  a  rough  test  of  ability. 

But  a  change  soon  sets  in.  As  society  differentiates, 
classes  arise  who  support  themselves  not  from  their  prop- 
erty, but  from  their  earnings.  Manifestly  he  who  earns  a 
salary  cannot  be  declared  entirely  devoid  of  ability  to  pay,  as 
compared  with  one  who  receives  the  same  amount  as  interest 

1  "  While  there  is  no  fairer  or  better  mode  of  taxation  than  the  ad  valorem 
system  properly  and  justly  administered,  there  is  none  more  oppressive  or 
unjust  and  unequal  when  loosely  or  imperfectly  executed."  Beport  of  the 
Comptroller-General  of  Georgia,  1894,  p.  5. 


THE  GENERAL  PROPERTY  TAX  55 

on  a  principal,  or  as  profits  on  property.  Moreover,  the  pro- 
ductiveness of  property  becomes  a  controlling  element  in  ' 
calculating  the  owner's  ability.  Of  two  factory  owners,  one 
may  be  running  full  time  and  making  large  profits ;  the 
other  may  be  compelled  to  keep  his  factory  closed,  earning 
nothing.  Of  two  landowners,  one  may  employ  improved 
processes  and  enjoy  a  large  product;  the  other,  although 
on  equally  valuable  land,  may  suffer  climatic  reverses  and 
produce  far  less.  Of  two  capitalists,  one  may  invest  his 
property  so  as  to  obtain  large  proceeds;  the  other  may  put 
an  equal  amount  into  an  enterprise  which  yields  very  little. 
It  is  plainly  incorrect  to  say  that  the  ability  in  these  cases 
varies  with  the  property.  The  test  of  ability  is  shifted 
from  property  to  product,  proceeds  or  earnings. 

The  truth  of  this  principle  is  faintly  recognized  in  the 
legislation  of  all  countries  one  step  removed  from  the 
primitive  tax  system.  Its  application  can  be  seen  in  some 
of  the  mediaeval  town  taxes,  where  the  earnings  of  the 
artisans  and  tradesmen  were  taxable,  as  evidences  of  ability 
or  faculty,  side  by  side  with  the  property  of  others.  It  can 
be  seen  also  in  various  attempts  of  medieval  states  to  tax  the 
proceeds  or  rents  of  land,  the  salaries  of  officials  and  the 
products  of  individual  exertion.  In  like  manner,  it  can  be 
seen  in  the  early  legislation  of  the  American  colonies. 
Thus  the  tax  law  of  1634  in  Massachusetts  Bay  provided  for 
the  assessment  of  each  man  "according  to  his  estate  and 
with  consideration  of  all  other  his  abilityes  whatsoever." 
The  measure  of  ability,  however,  was  still  property,  as 
appears  from  the  provision  of  1635  that  "  all  men  shall 
be  rated  for  their  whole  abilitie,  wheresoever  it  lies."  By 
1646,  the  glimmering  of  the  new  idea  is  seen;  for  the  law 
now  provides  not  only  for  rating  of  all  "estates,  both  real 
and  personal,"  but  also  for  the  taxation  of  "manual  persons 
and  artists, "  who  "  are  to  be  rated  for  returns  and  gains 
proportionable  unto  other  men  for  the  produce  of  their 
estates."  In  other  words,  not  only  property  but  product  was 
taken  into  account.  In  many  of  the  other  American  colonies, 


56  ESS  AYS  IN  TAXATION 

also,  the  profits  of  certain  classes  were  taxable  like  the  produce 
of  estates,  by  what  was  known  as  the  faculty  tax  or  the 
assessment  on  the  faculty.1  We  see,  therefore,  how  wide 
of  the  mark  is  the  recent  statement  that  the  system  which 
the  Americans  instinctively  adopted  was  "  the  equal  taxation 
of  property,  the  non-taxation  of  labor." 

In  the  colonies,  indeed,  these  laws  mark  only  the  first 
faint  attempts  to  substitute  product  for  property  as  the 
basis  of  taxation.  Later  on,  the  distinction  was  lost  sight 
of  and  the  attempt  abandoned.  But  in  Europe  the  develop- 
ment continued  and  the  basis  of  the  tax  system  was  changed 
from  property  to  product.  Thus  taxes  on  land,  houses, 
wages,  salaries,  interest,  profits,  etc.,  gradually  supplanted 
the  property  tax,  and  formed  a  more  or  less  complete  system 
based  on  product.  In  modern  societies,  as  we  have  seen, 
the  basis  of  taxation  has  very  recently  again  shifted  from 
product  to  income.  The  point  here  to  be  noticed  is  that 
throughout  all  Europe  the  mediaeval  basis  of  taxation  —  the 
mass  of  property  —  was  abandoned  because  it  no  longer 
corresponded  to  the  demands  of  justice.  The  property  tax 
is  theoretically  unjust  because  property  no  longer  measures 
the  ability  to  pay  —  because  property  has  been  replaced  by 
product  as  an  index  to  faculty. 

This  is  the  reason  for  the  failure  of  the  property  tax.  It 
has,  indeed,  been  contended  by  some,  as,  for  instance,  by 
President  Walker,  that  the  fatal  defect  of  the  property  tax 
consists  in  its  constituting  a  penalty  on  savings.2  This 
criticism  seems  to  be  questionable,  for  the  same  objection 
would  attach  to  any  tax  based  on  income  just  so  far  as 
income  exceeds  expenditures.  An  income  tax  on  the  surplus 
is  equally  a  tax  on  savings.  There  is  no  difference  in  this 
respect  between  a  property  tax  and  this  portion  of  an  income 
tax.  The  only  logical  conclusion  from  this  objection  to  the 

1  For  the  details  of  this  development  see  my  article  on  "  The  Income  Tar 
in  the  American  Colonies  and  States,"  in  Political  Science  Quarterly,  June, 
1895  (vol.  x.,  pp.  221-247). 

2  Political  Science  Quarterly,  iii.,  p.  3. 


THE  GENERAL  PROPERTY  TAX  57 

property  tax  is  a  tax  on  expense.  If  we  wish  to  avoid  taxing 
savings,  we  must  tax  only  expenditure.  And  yet  President 
Walker  correctly  opposes  the  expense  tax  as  the  most  unjust 
of  all.  The  property  tax  is  unjust,  not  because  it  is  a  penalty 
on  savings,  but  because  property  is  no  longer  a  measure  of 
ability. 

There  is  not  a  single  scientist  of  note  who  upholds  the 
property  tax  as  the  sole  or  chief  direct  contribution.  Some  of 
the  German  writers  on  finance  do,  indeed,  advocate  a  general 
property  tax,  but  simply  as  a  subordinate  supplement  to  all 
existing  direct  taxes,1  and  mainly  as  an  adjunct  to  the  income 
tax,  in  order  to  tax  income  from  property  more  than  profes- 
sional or  individual  earnings.  These  writers,  however,  over- 
look the  fact  that  the  same  result  may  be  attained  by 
making  a  difference  in  the  rate  of  the  income  tax,  as  in  Italy. 
Above  all,  the  continental  countries  have  been  so  long  exempt 
from  the  general  property  tax  that  the  European  writers 
have  given  it  very  little  attention,  have  forgotten  its  short- 
comings and  have  failed  to  analyze  its  inherent  defects. 

One  other  argument  of  somewhat  more  weight  is  some- 
times advanced  in  favor  of  the  property  tax,  viz.,  that  under 
any  other  system  unproductive  property,  like  jewelry,  art 
collections,  unimproved  lands,  etc.,  would  be  exempt.  This 
consideration  at  its  best  does  not  justify  a  general  property 
tax,  but  a  tax  on  special  kinds  of  property.  Entirely  apart 
from  the  impolicy  of  taxing  art  collections,  or  the  impossi- 
bility of  discovering  jewelry,  or  the  utter  insignificance  of 
this  kind  of  property  when  compared  with  the  total  national 
wealth,  the  argument  is  defective.  The  conversion  of  capi- 
tal into  unproductive  wealth  of  itself  destroys  the  reve- 
nue, which  is  the  only  true  fund  for  the  payment  of  taxes. 
It  is  undeniable  that  if  the  property  were  productive,  and  if 
the  tax  were  levied  on  the  product,  the  owner  would  pay  a 

1  Cf.  Gustav  Cohn,  Finanzwissenschaft,  §  476 :  "  Neben  der  Erwerbsbe- 
steuerung  bleibt  fiir  die  Besitzbesteuerung  heute  nur  ein  beschrankter  Raum 
librig."  See  the  English  translation,  p.  566:  "The  taxation  of  earnings  as 
it  exists  to-day  leaves  but  scant  room  for  taxes  on  possessions." 


58  ESSAYS  IN  TAXATION 

larger  sum.  But  on  the  other  hand,  his  revenue  would  be 
still  greater  and  his  annual  surplus  above  the  tax  would  con- 
stitute an  ever-increasing  productive  fund.  To  leave  un- 
productive property  free  may  thus  indeed  lessen  the  share  of 
the  government,  but  seems  to  be  nothing  more  than  justice 
to  the  individual.  His  renunciation  of  revenue  diminishes 
pro  tanto  his  tax-paying  ability.  It  is  really  only  because  of 
the  belief  that  the  possession  of  these  articles  of  consumption 
involves  an  expenditure  for  their  maintenance,  or  forms  an 
indirect  proof  that  their  owner  is  able  not  only  to  retain  these 
articles  of  luxury,  but  also  to  live  in  comfort  on  his  income, 
that  we  attempt  to  tax  this  kind  of  property.  In  other 
words,  just  as  relative  expenditures  of  certain  kinds  afford 
a  rough  criterion  of  a  man's  income,  because  his  standard  of 
living  usually  bears  a  fairly  definite  relation  to  his  income, 
so  the  taxation  of  special  articles  of  property  may  really  be 
considered  an  indirect  way  of  getting  at  relative  revenue. 
But  precisely  because  it  is  very  rough  and  indirect,  it  is  in 
the  main  unsatisfactory. 

The  great  element  of  reason  in  the  demand  for  the  taxation 
of  unproductive  property  is  to  be  found  in  the  assessment  of 
real  estate.  It  is  an  undoubted  fact  that  real  estate  is  often 
held  for  speculative  purposes,  and  that  it  is  the  duty  of  the 
community  not  to  encourage  such  speculation  by  exempting 
vacant  lands  from  taxation.  The  owner  expects  to  reap 
from  the  future  value  of  the  land,  whether  he  sells  or  keeps 
it,  a  snm  more  than  sufficient  to  recompense  him  for  his 
outlay  and  intervening  loss  of  interest  and  profit.  He  is 
prospectively  earning  an  annual  revenue  from  the  land, 
whose  present  unproductiveness  is  technical  rather  than  real. 
It  is  thus  perfectly  logical  to  tax  unproductive  real  estate 
even  though  the  basis  of  taxation  be  product  rather  than 
property.  It  is  the  estimated,  rather  than  the  actual,  product 
that  is  taxed. 

But  even  granting  that  there  is  this  justification  for  a  tax 
on  certain  forms  of  unproductive  property,  it  would  not 
strengthen  the  case  for  a  general  property  tax.  At  best  it 


THE  GENERAL  PROPERTY  TAX  59 

would  simply  mean  that  the  tax  on  product  should  be  supple- 
mented by  a  tax  on  certain  kinds  of  unproductive  property, 
which  are  really  prospectively  productive.  No  one  has  ever 
objected  to  a  real  estate  tax,  whether  it  be  levied  on  the  basis 
of  value  or  of  assumed  product.  But  a  real  estate  tax  is  not 
a  general  property  tax  ;  the  principle  of  the  real  estate  tax 
does  not  signify  that  property  in  general  should  be  made  the 
test  of  ability  to  pay.  We  may,  therefore,  still  assert  that 
if  there  are  any  evils  arising  from  the  absence  of  a  general 
property  tax,  they  are  slight  when  compared  to  the  evils 
inseparable  from  its  existence. 

IV.    Conclusion. 

From  the  preceding  survey  it  is  difficult  to  escape  the 
conclusion  that  the  general  property  tax  as  the  main  source 
of  public  revenue  is  a  failure  from  the  triple  standpoint  of 
history,  theory  and  practice. 

Historically,  the  property  tax  was  once  well-nigh  uni- 
versal. Far  from  being  an  original  idea  which  the  Ameri- 
cans instinctively  adopted,  it  is  found  in  all  early  societies 
whose  economic  conditions  were  similar  to  those  of  the 
American  colonies.  It  was  the  first  crude  attempt  to  attain 
a  semblance  of  equity,  and  it  at  first  responded  roughly  to 
the  demands  of  democratic  justice.  In  a  community  mainly 
agricultural,  the  property  tax  was  not  unsuited  to  the  social 
conditions.  But  as  soon  as  commercial  and  industrial  con- 
siderations came  to  the  foreground  in  national  or  municipal 
life,  the  property  tax  decayed,  became  a  shadow  of  its  former 
self,  and  while  professing  to  be  a  tax  on  all  property,  ulti- 
mately turned  into  a  tax  on  real  property.  The  disparity 
between  facts  and  appearances,  between  practice  and  theory, 
almost  everywhere  became  so  evident  and  engendered  such 
misery,  that  the  property  tax  was  gradually  relegated  to  a  sub- 
ordinate position  in  the  fiscal  system,  and  was  at  last  com- 
pletely abolished.  All  attempts  to  stem  the  current  and  to 
prolong  the  tax  by  a  more  stringent  administration  had  no 


60  ESSAYS  IN  TAXATION 

effect  but  that  of  injurious  reaction  on  the  morale  of  the  com- 
munity. America  is  to-day  the  only  great  nation  deaf  to 
the  warnings  of  history.  But  it  is  fast  nearing  the  stage 
where  it,  too,  will  have  to  submit  to  the  inevitable. 

Theoretically,  we  have  found  that  the  general  property  tax 
is  deficient  in  two  respects.  First,  the  theory  presupposes 
that  there  is  an  ascertainable  general  property  —  a  definite 
surplus  of  assets  over  liabilities.  In  primitive  social  condi- 
tions this  is  true  ;  there  is  a  composite  mass  of  property, 
because  there  is  no  industrial  differentiation.  But  in  the 
modern  age  property  is  split  up  into  a  hundred  elements,  so 
that  if  we  attempt  to  tax  each  element  separately,  it  is  often 
impossible  to  decide  from  which  category  deductions  are  to 
be  made  for  indebtedness.  An  individual,  for  instance, 
owes  more  on  his  book  accounts  than  is  due  to  him. 
Granting  that  he  therefore  pays  no  tax  on  his  book  accounts, 
shall  he  be  permitted  to  deduct  this  surplus  of  debt  from 
the  value  of  his  real  estate  ?  This  is  manifestly  inadmissible. 
And  yet  unless  this  is  done  he  is  taxed  not  on  his  property, 
but  on  his  surplus  of  debt — not  on  his  real  assets,  but  on 
what  he  owes  ;  not  on  his  ability,  but  on  his  liability.  The 
theory  of  the  property  tax  is  not  carried  out ;  and  it  cannot 
be  carried  out  because  the  conditions  of  the  theory  fail. 
The  general  mass  of  property  has  disappeared,  and  with  it 
vanishes  the  foundation  of  the  general  property  tax. 

Secondly,  the  property  tax  is  faulty,  because  property  is 
no  longer  a  criterion  of  faculty  or  tax-paying  capacity.  Two 
equal  masses  of  property  may  be  unequally  productive,  and 
hence  unequally  affect  the  margin  of  income  from  which 
the  public  contributions  are  paid.  The  standard  of  ability 
has  been  shifted  from  property  to  product  ;  the  test  now  is 
not  the  extent,  but  the  productivity,  of  wealth.  And  since 
revenue  is  a  better  index  than  wealth,  the  vast  class  of 
earnings  derived  not  from  property  but  from  exertion  is 
completely  and  unjustifiably  exempted  by  the  taxation  of 
property  alone.  The  theory  of  the  property  tax  again  fails 
because  the  conditions  of  the  theory  have  disappeared. 


THE  GENERAL  PROPERTY  TAX  61 

Practically,  the  general  property  tax  as  actually  admin-  .^ 
istered  is  beyond  all  doubt  one  of  the  worst  taxes  known  in 
the  civilized  world.  Because  of  its  attempt  to  tax  intangible 
as  well  as  tangible  things,  it  sins  against  the  cardinal  rules 
of  uniformity,  of  equality  and  of  universality  of  taxation. 
It  puts  a  premium  on  dishonesty  and  debauches  the  public 
conscience  ;  it  reduces  deception  to  a  system,  and  makes 
a  science  of  knavery ;  it  presses  hardest  on  those  least 
able  to  pay  ;  it  imposes  double  taxation  on  one  man  and 
grants  entire  immunity  to  the  next.  In  short,  the  general 
property  tax  is  so  flagrantly  inequitable,  that  its  retention 
can  be  explained  only  through  ignorance  or  inertia.  It  is 
the  cause  of  such  crying  injustice  that  its  alteration  or  its 
abolition  must  become  the  battle  cry  of  every  statesman 
and  reformer.1 

1 1  do  not  wish  to  be  understood  as  favoring  either  the  exclusive  taxation 
of  real  estate  or  the  single  tax  on  land-values.  Even  as  the  sole  direct  taxes, 
these  forms  are  inadequate,  as  will  be  shown  in  the  succeeding  chapters. 


62  ESS AyS  IN  TAXATION 


AMERICAN  BIBLIOGRAPHY  OF   THE   GENERAL 
PROPERTY  TAX.1 

1.  AMES,  JOHN  H.     The  Taxation  of  Personal  Property.     Des  Moines, 

1877. 

2.  AMES,  JOHN  H.     The  Taxation  of  Real  Property  and  Corporations. 

Des  Moines,  1878. 

3.  ANDREWS,  GEORGE  H.     Taxation.     Address  .  .  .  before  the  Assem- 

bly Committee  of  Ways  and  Means  of  the  State  of  New  York. 
New  York,  1874. 

4.  ANDREWS,  GEORGE  H.    Unequal  State  Taxation.    New  York,  1875. 

5.  ANDREWS,  GEORGE  H.     Taxes  and  Assessments  in  New  York  City. 

New  York,  1876. 

6.  ANDREWS,  GEORGE  H.    Twelve  Letters  on  the  Future  of  New  York. 

New  York,  1877. 

7.  BROWN,  FREDERICK  J.    Short  Talks  on  Taxes  with  special  reference 

to  the  Hayes  BUI  of  1892.     Baltimore,  1894. 

8.  COCHRAN,  THOMAS.    Local  Taxation.    Philadelphia,  1871. 

9.  COCHRAN,  THOMAS.    Methods  of  Valuation  of  Real  Estate  for  Taxa- 

ation.     1874. 

10.  CROCKER,  GEORGE  G.    An  Exposition  of  the  Double  Taxation  of 

Personal  Property  in  Massachusetts.     Boston,  1885. 

11.  CROCKER,  GEORGE  G.    The  Injustice  and  Inexpediency  of  Double 

Taxation.     Boston,  1892. 

12.  DANA,  RICHARD  H.    Double  Taxation,  unjust  and  inexpedient. 

Boston,  1892. 

13.  DOUGLAS,  CHARLES   H.  J.     Financial  History  of  Massachusetts. 

Columbia  College  Studies  in  History,  Economics  and  Public  Law. 
Vol.  i.,  no.  4.     New  York,  1892. 

14.  ELY,  RICHARD  T.,  and  FINLEY,  J.  H.    Taxation  in  American  States 

and  Cities.     New  York,  1888. 

15.  ENDICOTT,  WILLIAM,  Jr.    The  Taxation  of  Tangible  Things.     Bos- 

ton, 1875. 

16.  ENSLEY,  ENOCH.     The  Tax  Question:  What  should  be  taxed  and 

how  it  should  be  taxed.     Suggestions  for  the  People  of  Tennessee 
to  consider.     Nashville,  1873. 

17.  HAMILTON,  JOHN.     The  Tax  Problem.     An  Address  delivered  at  the 

Annual  Meeting  of  the  Pennsylvania  State  Board  of  Agriculture. 
Harrisburg,  1891. 

18.  HINCKLEY,  ISAAC.     Unequal  Taxation  in  Delaware.    Philadelphia, 

1875. 

1  For  the  official  reports,  see  infra,  chap.  xiii.    For  a  bibliography  of  the 
corporation  tax,  see  infra,  chap.  viii. 


THE  GENERAL  PROPERTY  TAX  63 

19.  HILLS,  THOMAS.     Address  on  Taxation.     Boston,  1890. 

20.  LANE,  JONATHAN   A.     Address  on  Taxation  at  a  Meeting  of  the 

Boston  Executive  Business  Association.     Boston,  1891. 

21.  MINOT,  WILLIAM,  Jr.     Local  Taxation  and  Public  Extravagance. 

Boston,  1877. 

22.  MINOT,  WILLIAM,  Jr.      Taxation  in  Massachusetts.     2d  edition. 

Boston,  1877. 

23.  PEABODY,  A.  P.     Address  on  Taxation.     Boston,  1833. 

24.  PERRY,  A.  L.     Extra-territorial  Taxation.     Boston,  1875. 

25.  QUINCY,  JOSIAH  P.     Double  Taxation  in  Massachusetts.     Boston, 

1889. 

26.  RIPLEY,  WILLIAM  Z.      Financial  History  of  Virginia.     Columbia 

College  Studies  in  History,  Economics  and  Public  Law.     Vol.  iv., 
no.  1.    New  York,  1893. 

27.  ROPES,  JOHN  C.    Taxation  of  Mortgaged  Real  Estate.    Boston,  1881. 

28.  SCHWAB,  JOHN  C.     History  of  the  New  York  Property  Tax.    Amer- 

ican Economic  Association.     1890. 

29.  SHEARMAN,  THOMAS  G.     Taxation  of  Personal  Property,  imprac- 

ticable, unequal  and  unjust.     New  York,  1895.  * 

30.  SHERMAN,  ISAAC.    Exclusive  Taxation  of  Real  Estate  and  the  Fran- 

chises of  a  few  specified  moneyed  Corporations  and  Gas  Compa- 
nies.    New  York,  1875. 

31.  WALKER,  FRANCIS.    Double  Taxation.    Columbia  College  Studies 

in  History,  Economics   and   Public   Law.     Vol.  v.,  no.  1.     New 
York,  1895. 

32.  WELLS,  DAVID  A.     Theory  and  Practice  of  Local  Taxation  in  the 

United  States.     Boston,  1874. 

33.  WELLS,  DAVID  A.    The  Reform  of  Local  Taxation.    Boston,  1876. 

34.  WHITMORE,  WILLIAM  H.     Unjust  Taxes.    A  Criticism  of  the  Massa- 

chusetts System  of  Local  Taxation.     Boston,  1877. 

35.  WILLIS,  BENJAMIN   A.     Remarks  on  the   Bill  providing  for  the 

Exemption  of  Mortgages  on  Real  Estate  from  Taxation.     New 
York,  1873. 

36.  WOOD,  FREDERICK  A.     History  of  Taxation  in  Vermont.     Colum- 

bia College  Studies  in  History,  Economics  and  Public  Law.     Vol. 
iv.,  no.  3.     New  York,  1894. 

37.  WORTHINGTON,  T.  K.     Historical  Sketch  of  the  Finances  of  Penn- 

sylvania.    American  Economic  Association.     1887. 

38.  Municipal  Taxation.     Argument  submitted  to  the  Revisory  Com- 

mission [by  R.  W.  Knott  and  A.  W.  Humphrey].     Louisville,  1892. 


CHAPTER  III. 

THE  SINGLE   TAX. 

AMONG  the  schemes  for  social  and  tax  reform,  few  have 
been  more  earnestly  and  enthusiastically  supported  than  the 
single  tax.  Many  persons,  however,  have  only  a  faint  idea 
of  what  the  scheme  really  is ;  while  others  have  been  so  in- 
fluenced by  the  specious  arguments  of  its  advocates,  that  they 
have  not  troubled  themselves  to  investigate  the  problem  from 
the  standpoint  of  exact  economic  knowledge.  Let  us  attempt, 
in  the  following  pages,  to  explain  the  nature  of  the  single  tax 
and  to  state  the  objections  that  may  be  urged  against  it. 

I.    What  is  the  Single  Tax? 

In  the  first  place,  the  single  tax  denotes,  as  its  name 
implies,  the  only  tax,  the  exclusive  tax,  the  tax  on  some  one 
class  of  things.  The  idea  that  the  wants  of  the  state  may 
be  supplied  by  such  a  tax  is  not  a  new  one.  During  the 
seventeenth  and  eighteenth  centuries,  a  band  of  reformers  in 
England  as  well  as  on  the  continent  put  forward  the  idea  of 
a  single  tax  on  expense.1  So  many  of  the  privileged  classes 
had  succeeded  in  securing  exemption  from  the  various  direct 
taxes,  that  it  was  hoped  to  realize  a  substantial  universality 
of  taxation  by  taxing  everybody  on  his  expenditure  ;  and 
since  it  was  supposed  that  this  tax  could  be  evaded  by  no  one, 
it  was  for  a  time  very  popular.  Later  on  in  the  eighteenth 
century,  there  was  a  party  in  England,  whose  motto  was  a 
single  tax  on  houses.  Again,  at  the  beginning  of  this  cen- 
tury, the  experience  of  England  with  the  income  tax  led  a 

1  Supra,  p.  10. 
64 


THE  SINGLE  TAX  65 

number  of  writers  on  the  continent  to  advance  the  plan  of  a 
single  tax  on  incomes.  Finally,  during  the  past  few  years, 
in  France  the  project  of  a  single  tax  on  capital  has  been 
enthusiastically  advocated  not  by  socialists,  but  by  some 
conservative  reformers.  The  single  tax  of  Henry  George  is 
thus  simply  the  last  of  many  similar  schemes  that  have  been 
propounded ;  and  it  is  not  improbable  that  after  it  has  dis- 
appeared economists  of  the  future  will  be  occupied  in  dealing 
with  yet  another  form  of  single  tax. 

The  present  scheme  is  a  single  tax  on  land  values  —  that 
is,  a  tax  on  the  value  of  the  bare  land  irrespective  of  the 
buildings  or  other  improvements  in  or  on  the  land.  Curi- 
ously enough  the  taxation  of  land  has  been  supported  by  two 
lines  of  argument  which  are  fundamentally  opposed.  Thus 
over  twenty  years  ago  Mr.  Isaac  Sherman,  an  eminent  citizen 
of  the  city  of  New  York,  proposed  a  plan  by  which  all  state 
and  local  taxes  at  least  were  to  be  levied  on  real  estate. 
Mr.  Sherman  and  his  followers  confessed  that  taxes  ought 
to  be  borne  by  the  whole  community.  They  favored  the 
taxation  of  land  on  the  theory  that  the  tax  would  be  shifted  ' 
from  the  landowner  to  the  consumer,  and  would  thus  be 
diffused  throughout  the  community.  As  every  one  is  a  con- 
sumer, each  would  in  the  end  bear  his  share  of  the  burden. 
The  tax  would,  moreover,  have  the  additional  merits  of  sim- 
plicity and  convenience. 

Many  people  to-day  declare  their  adhesion  to  a  tax  on  land 
for  this  reason.  But  it  is  remarkable  that  what  constitutes 
the  chief  advantage  of  the  tax  in  the  eyes  of  this  party  is 
regarded  in  precisely  the  opposite  way  by  the  real  advocates 
of  the  single  tax  on  land  values.  Mr.  Sherman  said  that  the 
tax  on  real  estate  is  to  be  recommended  because  it  falls  only 
nominally  on  the  owner,  and  is  in  fact  shifted  to  the  con- 
sumer. Mr.  George  says  that  the  tax  on  land  values  will 
stay  where  it  is  put,  namely,  on  the  landowner,  and  that  it 
is  to  be  recommended  precisely  because  it  will  not  be  shifted 
to  the  consumer.  The  difference  between  the  two  theories 
could  not  be  more  fundamental. 


66  ESSAYS  IN  TAXATION 

As  between  these  two  theories,  there  is  a  substantial  con- 
sensus of  opinion  among  economists  that  Mr.  George  is 
correct.  From  the  time  of  Ricardo,  it  has  been  well-nigh 
universally  confessed  that  a  tax  on  land  values,  i.e.  a  tax 
on  economic  rent,  will  fall  wholly  on  the  owner.1  This  is 
precisely  the  reason  why  the  scheme  is  advocated  by  the 
single-taxers,  who  desire  to  tax  the  landowner  out  of  exist- 
ence—  to  take  away  from  the  owner  of  the  land  all  his 
revenue  rights  in  the  land.  The  essential  antagonism  be- 
tween the  two  schemes,  therefore,  cannot  be  emphasized  too 
strongly.  The  one  desires  a  land  tax  because  it  will  be  borne 
by  the  whole  community ;  the  other  desires  a  tax  on  land 
values  because  it  will  be  borne  not  by  the  whole  community, 
but  by  a  particular  class.  Yet  many  persons  who  really 
favor  the  former  theory  mistakenly  give  their  adhesion  to 
the  latter.  There  are  many  so-called  single-taxers  who 
simply  believe  that  a  land  tax  is  the  most  convenient  of  all 
methods  for  securing  the  desired  equality  of  burden.  In 
reality,  there  is  no  kinship  between  them  and  the  single- 
taxers  proper.  Mr.  George  warns  us  not  to  confuse  a  tax 
on  land  with  a  tax  on  land  value. 

II.    The  General  Theory. 

The  general  economic  theory  on  which  the  demand  for  the 
single  tax  is  based  may  be  summed  up  in  a  few  words. 
Land  is  the  creation  of  God  ;  it  is  not  the  result  of  any 
man's  labor ;  no  one,  therefore,  has  a  right  to  own  land. 
Increase  in  the  value  of  land  is  due  mainly  to  the  growth  of 
the  community ;  like  the  land  itself,  it  is  not  the  result  of 
any  individual  effort;  it  is  an  unearned  increment  which 
properly  belongs  to  society.  Moreover,  private  property  in 
land  is  undoubtedly  the  cause  of  all  social  evils.  It  therefore 
becomes  the  duty  of  the  government  to  take  what  rightfully 
belongs  to  the  whole  community.  Every  one  may  still  retain 
the  result  of  his  own  labor ;  but  the  value  of  the  bare  land, 
1  See  the  author's  The  Shifting  and  Incidence  of  Taxation  (2d  ed.),  p.  223. 


THE  SINGLE  TAX  67 

the  economic  rent,  must  be  taken  for  the  state.  In  this  way, 
and  in  this  way  alone,  can  the  social  problem  be  solved.  The 
consequences  are  epitomized  as  follows  in  the  platform  of 
the  Single  Tax  League  :  "  It  would  solve  the  labor  problem, 
do  away  with  involuntary  poverty,  raise  wages  in  all 
occupations  to  the  full  earnings  of  labor,  make  over-pro- 
duction impossible  until  all  human  wants  are  satisfied, 
render  labor-saving  inventions  a  blessing  to  all,  and  cause 
such  an  enormous  production  and  such  an  equitable  dis- 
tribution of  wealth  as  would  give  to  all  comfort,  leisure, 
and  participation  in  the  advantages  of  an  advancing  civili- 
zation." 

This  is  an  inviting  prospect.  It  is  not  so  much  a  method 
of  tax  reform,  as  a  panacea  for  human  ills,  that  is  here  set 
forth.  It  would  be  interesting  to  discuss  this  fine  fabric  of 
the  ideal.  But  we  must  be  more  modest  and  confine  our 
attention  to  the  scheme  primarily  as  a  practical  method  of 
tax  reform. 

In  order  to  attain  a  basis  for  this  discussion,  it  is  neces- 
sary to  allude  to  the  two  fundamental  doctrines  on  which 
the  plan  is  founded.  The  first  is  the  underlying  theory 
of  private  property ;  the  second  is  the  theory  of  the  relation 
of  the  individual  to  the  public  purse. 

In  the  first  place,  the  single-tax  theory  of  property  is  the 
labor  theory  —  the  theory  that  individual  human  labor  con- 
stitutes the  only  clear  title  to  property.  It  would  be  inter- 
esting, were  there  space,  to  trace  the  genesis  of  this  doctrine. 
The  Romans,  as  is  well  known,  had  an  entirely  different 
theory  —  the  occupation  theory,  based  on  the  right  of  the 
first  occupant.  Against  this  rather  brutal  doctrine,  which 
in  the  early  middle  ages  paved  the  way  for  intolerable 
abuses,  the  philosophers  advanced  the  labor  theory,  hoping 
thereby  to  bring  about  a  reform  in  actual  institutions. 
The  labor  theory  went  hand  in  hand  with  the  doctrine 
of  natural  rights,  which  was  the  result  of  an  earnest 
attempt  to  abolish  the  abuses  of  the  ancien  regime,  and 
which  came  to  a  climax  in  the  eighteenth  century. 


68  ESSAYS  IN  TAXATION 

Modern  jurisprudence  and  modern  political  philosophy,  how- 
ever, have  incontestably  proved  the  mistake  underlying  thip 
assumption  of  natural  law  or  natural  rights.  They  have 
shown  that  natural  law  is  simply  the  idea  of  particular 
thinkers  of  a  particular  age  of  what  ought  to  be  law. 
These  particular  thinkers,  indeed,  often  influence  the  social 
consciousness,  as  they  in  turn  are  influenced  by  it,  so  that 
natural  law  may  be  called  law  in  the  making.  But  at  any 
given  time  it  represents  simply  an  ideal.  Whether  that 
ideal  will  approve  itself  to  society  depends  on  a  variety  of 
circumstances,  but  chiefly  on  the  question  whether  society 
is  prepared  for  the  change.  Just  as  the  modern  method  of 
jurisprudence  is  the  historical  method,  so  also  the  modern 
theory  of  property  may  be  called  the  social  utility  theory.1 

The  social  utility  theory  says  that  just  as  all  law,  all 
order  and  all  justice  are  the  direct  outgrowths  of  social 
causes,  and  just  as  private  ethics  is  nothing  but  the  con- 
sequence of  social  ethics,  so  private  property  is  to  be  jus- 
tified simply  by  the  fact  that  it  is  the  last  stage  of  a  slow 
and  painful  social  evolution.  At  the  outset,  property,  and 
especially  property  in  land,  was  largely  owned  in  common. 
It  was  only  through  the  gradual  progress  of  economic  and 
social  forces  that  private  property  came  to  be  recognized  as 
tending  on  the  whole  to  further  the  welfare  of  the  entire 
community.  The  social  utility  theory  does  not,  of  course, 
mean  that  what  has  once  been  must  always  be.  It  is  not 
a  reactionary  doctrine  which  looks  upon  all  that  is  as  good. 
It  simply  maintains  that  the  burden  of  proof  is  always  upon 
the  party  urging  the  change ;  and  that  when  the  change 
advocated  is  a  direct  reversal  of  the  progress  of  centuries, 
and  a  reversion  to  primitive  conditions  away  from  which 
all  history  has  travelled,  the  necessity  for  its  absolute 
proof  becomes  far  stronger.  The  nationalization  of  land 

1  For  the  best  exposition  of  the  insufficiency  of  the  doctrine  of  natural 
rights,  a  discussion  of  which  would  be  out  of  place  here,  the  reader  is  referred 
to  Ritchie,  Natural  Eights,  1895 ;  and,  with  special  reference  to  the  land 
question,  to  Huxley's  essay  on  "  Natural  Eights,  "  in  his  Collected  Essays. 


THE  SINGLE  TAX  69 

is  a  demand  which,  in  order  to  win  general  acceptance,  must 
be  based  on  theories  independent  of  the  doctrine  of  natural 
rights. 

Even  though  we  accept  the  theory  of  natural  rights,  we 
need  not  therefore  accept  the  single  tax.  If  it  be  said  that 
the  value  of  land  is  wholly  the  work  of  the  community,  and 
that  therefore  every  one  has  a  natural  right  to  it,  how  can  ^ 
we  logically  deny  that  the  value  of  any  so-called  product  is, 
at  least  partly,  the  work  of  the  community?  Mr.  George 
bases  his  defence  of  private  property  in  commodities  other 
than  land  on  the  labor  theory.  Yet  individual  labor,  it  may 
be  said,  has  never  by  itself  produced  anything  in  civilized 
society.  Take,  for  example,  the  workman  fashioning  a  chair. 
The  wood  has  not  been  produced  by  him ;  it  is  the  gift  of 
nature.  The  tools  that  he  uses  are  the  result  of  the  con- 
tributions of  others ;  the  house  in  which  he  works,  the 
clothes  he  wears,  the  food  he  eats  (all  of  which  are  necessary 
in  civilized  society  to  the  making  of  a  chair),  are  the  result 
of  the  contributions  of  the  community.  His  safety  from 
robbery  and  pillage  —  nay,  his  very  existence  —  is  dependent 
on  the  ceaseless  co-operation  of  the  society  about  him.  How 
can  it  be  said,  in  the  face  of  all  this,  that  his  own  individual 
labor  wholly  creates  anything?  If  it  be  maintained  that  he 
pays  for  his  tools,  his  clothing  and  his  protection,  it  may 
be  answered  that  the  landowner  also  pays  for  the  land. 
Nothing  is  wholly  the  result  of  unaided  individual  labor. 
No  one  has  a  right  to  say:  This  belongs  absolutely  and  com- 
pletely to  me,  because  I  alone  have  produced  it.  Society, 
from  this  point  of  view,  holds  a  mortgage  on  everything  that 
is  produced.  The  socialists  have  been  in  this  respect  more 
logical ;  and  that  perhaps  explains  why  the  movement  to 
which  Mr.  George  gave  such  an  impetus  in  England  and 
elsewhere  is  fast  changing  from  one  in  favor  of  land  nation- 
alization into  one  for  the  nationalization  of  all  means  of 
production.  The  socialists,  indeed,  as  well  as  Mr.  George, 
are  in  error,  because  the  premises  of  each  are  wrong.  It 
is  not  the  labor  theory,  but  the  social  utility  theory,  which 


70  ESSAYS  IN  TAXATION 

is  the  real  defence  of  private  property.  But  if  we  accept 
the  premises  of  the  single-taxers,  we  are  inevitably  impelled 
to  go  further  than  they  do.  The  difference  between  property 
in  land  and  property  in  other  things  is  from  the  standpoint 
of  individual  versus  social  effort  simply  one  of  degree,  not  of 
kind. 

The  other  fundamental  doctrine  of  the  advocates  of  the 
single  tax  is  the  theory  of  benefit,  —  the  doctrine  that  a  man 
ought  to  contribute  to  public  burdens  in  proportion  to  the 
benefits  that  he  receives.  The  theory  is  that,  since  the 
individual  gets  a  special  advantage  from  the  community  in 
the  shape  of  unearned  increment,  he  ought  to  make  some 
recompense.  To  this  contention,  two  answers  may  be  made : 
first,  that  the  benefit  theory  of  taxation  is  inadequate ;  and 
second,  that,  even  if  it  were  true,  it  would  not  support  the 
single  tax.  Let  us  take  up  these  in  turn. 

It  is  pointed  out  in  another  chapter  that  the  payments  made 
by  the  individual  to  the  government  are  exceedingly  diverse 
in  character.1  Where  the  government  acts  simply  as  a  pri- 
vate individual,  in  performing  certain  services  for  the  citi- 
zen, the  payment  is  a  price.  It  is  a  case  of  do  ut  facias. 
The  government  does  something ;  the  individual  gives  some- 
thing. Again,  even  after  common  interests  have  developed, 
the  individual  may  ask  the  government  to  do  some  particular 
thing  for  him,  to  confer  some  privilege  upon  him.  He  may 
wish  to  get  married  or  to  run  a  cab.  For  this  particular 
privilege  it  is  perfectly  proper  that  the  government  should 
make  a  charge  —  known  in  modern  times  as  a  fee  or  toll. 
Again,  the  government  may  be  at  considerable  expense  in 
laying  out  a  new  street,  the  result  of  which  will  be  to 
enhance  the  value  of  a  particular  plot  of  ground.  There 
is  then  no  reason  why  the  government  should  not  demand 
that  the  owner  of  this  plot  should  defray,  at  all  events  in 
part,  the  cost  of  this  improvement.  This  is  called  a  special 
assessment.  In  all  these  cases  the  individual  receives  an 
undeniable,  special  benefit  as  the  result  of  a  special  expendi- 
1  Infra,  chap.  ix. 


THE  SINGLE  TAX  71 

ture  made  by  the  government.     The  principle  of  give  and 
take,  therefore,  is  applicable. 

On  the  other  hand,  there  are  certain  actions  of  the  govern- 
ment which  interest  the  whole  community,  and  from  which 
the  individual  receives  no  benefit,  except  what  accrues  to  him 
incidentally  as  a  member  of  the  community.  If  the  govern- 
ment undertakes  a  war,  no  one  citizen  is  benefited  more  than 
another.  If  the  government  spends  money  for  cleaning  the 
main  thoroughfares,  for  erecting  tribunals,  or  for  patrolling 
the  city  by  police,  it  cannot  be  claimed  that  any  one  indi- 
vidual receives  a  measurable,  special  benefit;  all  are  equally  i^xX/ 
interested  in  good  government.  When  payment  is  made 
for  these  general  expenditures  —  and  such  a  payment  is 
called  a  tax  —  the  principle  of  contribution  is  no  longer  that 
of  benefits  or  of  give  and  take,  but  of  ability,  faculty,  capac- 
ity. Every  man  must  support  the  government  to  the  full 
extent,  if  need  be,  of  his  ability  to  pay.  He  does  not 
measure  the  benefits  of  state  action  to  himself  first,  because 
these  benefits  are  quantitatively  unmeasurable ;  and  secondly, 
because  such  measurement  implies  a  decidedly  erroneous  con- 
ception of  the  relation  of  the  individual  to  the  modern  state. 

At  one  time  the  doctrine  of  benefit  had  a  relative  justifica- 
tion. A  century  ago,  when  the  absolute  rulers  of  central 
Europe  loaded  down  their  subjects  with  grievous  burdens 
and  devoted  the  profits  to  their  own  petty  pleasures  — 
when  in  France,  for  example,  the  peasant  was  taxable  d 
merci  et  misSricorde  of  the  nobility  —  it  was  natural  that 
a  school  should  arise  to  protest  and  to  proclaim  the  principle 
of  benefits.  Their  argument  was  that  as  the  state  protects 
everybody,  everybody  is  under  a  duty  to  pay  taxes;  in 
other  words,  their  plea  was  for  universality  of  taxation. 
This  was  a  distinct  step  in  advance.  Later  on,  however, 
the  doctrine  was  stretched  to  assert  that  everybody  should 
pay  in  proportion  to  benefits  received,  with  the  implication 
that  if  the  state  could  not  be  proved  to  confer  any  special 
benefit  on  the  individual,  he  should  not  be  held  to  pay  any- 
thing. 


72  ESSAYS  IN  TAXATION 

As  thus  extended,  the  theory  has  been  rejected  by  well-nigh 
all  the  thinkers  of  the  last  fifty  years.  It  is  now  generally 
agreed  that  we  pay  taxes  not  because  the  state  protects  us, 
or  because  we  get  any  benefits  from  the  state,  but  simply 
because  the  state  is  a  part  of  us.  The  duty  of  supporting 
and  protecting  it  is  born  with  us.  In  civilized  society  the 
state  is  as  necessary  to  the  individual  as  the  air  he  breathes ; 
unless  he  reverts  to  stateless  savagery  and  anarchy  he  cannot 
live  beyond  its  confines.  His  every  action  is  conditioned  by 
the  fact  of  its  existence.  He  does  not  choose  the  state,  but 
is  born  into  it ;  it  is  interwoven  with  the  very  fibres  of  his 
being  ;  nay,  in  the  last  resort,  he  gives  to  it  his  very  life. 
To  say  that  he  supports  the  state  only  because  it  benefits 
him,  is  a  narrow  and  selfish  doctrine.  We  pay  taxes  not 
because  we  get  benefits  from  the  state,  but  because  it  is  as 
much  our  duty  to  support  the  state  as  to  support  ourselves 
or  our  family  ;  because,  in  short,  the  state  is  an  integral 
part  of  us. 

The  principle  of  benefit,  moreover,  would  lead  us  into  the 
greatest  absurdities.  If  we  accept  it,  we  must  apply  it  logi- 
cally ;  we  must  not  restrict  its  beneficent  workings  to  the 
landowner.  As  has  been  pointed  out  in  another  place,1  the 
poor  man,  according  to  the  theory  of  benefit,  ought  to  be 
taxed  more  than  the  rich,  because  he  is  less  able  than  the 
rich  man  to  protect  himself.  It  is,  however,  needless  to 
discuss  this  point  because,  as  we  have  seen  in  a  previous 
chapter,  ability  to  pay  is  not  only  the  ideal  basis  of  taxation, 
but  the  goal  toward  which  society  is  steadily  working.  It 
lies  instinctively  and  unconsciously  at  the  bottom  of  all  our 
endeavors  at  reform.  When  we  say  that  indirect  taxes  are 
on  the  whole  unfair  to  laborers,  we  mean  that  they  are  less 
able  than  the  wealthier  portion  of  the  community  to  pay 
the  tax.  When  we  say  that  a  corporation  with  large 
receipts  should  pay  more  than  one  with  small  receipts, 
we  do  so  because  we  know  that  its  ability  to  pay  is  greater. 
The  principle  of  privilege  or  benefit  is,  therefore,  not 

1  See  my  work  on  Progressive  Taxation  in  Theory  and  Practice,  p.  83. 


THE  SINGLE  TAX  73 

the  basis  of  taxation.  It  is  the  principle  away  from  which 
all  modern  science  and  progress  have  been  working.  It  is 
founded  on  a  false  political  philosophy,  and  it  can  result  only 
in  a  false  political  economy. 

But  even  if  we  accept  the  principle  of  benefit  or  oppor- 
tunity, it  will  not  justify  the  demand  for  the  single  tax. 
This  question,  however,  is  so  intimately  interwoven  with 
the  problem  of  the  justice  of  the  single  tax  that  we  shall 
discuss  it  a  little  further  on  under  that  head. 

III.    Practical  Defects. 

Let  us  now  leave  the  abstract  discussion  of  principles  and 
come  to  the  objections  that  may  be  urged  against  the  single 
tax  as  a  practical  method  of  tax  reform.  These  defects  may 
be  summed  up  under  four  heads :  First,  the  fiscal  defects  ; 
second,  the  political  defects  ;  third,  the  moral  defects  ;  and, 
fourth,  the  economic  defects. 

1.   Fiscal  Defects. 

One  of  the  great  aims  of  every  sound  financial  system  is 
to  bring  about  an  equilibrium  of  the  budget  —  that  is,  to 
avoid  a  surplus  as  well  as  a  deficit.  Now,  while  many  taxes 
may  be  suddenly  lowered,  not  many  of  them  can  be  made  to 
give  a  suddenly  increased  yield.  One  of  the  cardinal  prin- 
ciples of  taxation,  therefore,  is  elasticity,  in  order  to  secure 
which  requires  two  conditions.  In  the  first  place,  the  source 
from  which  the  tax  is  derived  must  be  of  such  a  nature  that 
an  increase  of  the  rate  will  always  mean  an  increase  of  the 
yield.  There  should  be  in  the  source  of  taxation  a  reserve 
power  which  can  be  drawn  upon  in  case  of  need.  Secondly, 
the  revenue  should  be  secured  from  a  number  of  objects,  so 
that  the  shrinkages  or  deficits  temporarily  due  to  the  one 
class  may  be  made  good  by  the  increase  or  surplus  revenues 
of  the  other  class.  Among  the  elastic  taxes  is  the  income 
tax,  and  it  is  well  known  that  in  English  finance  one  of  the 


74  ESS AyS  IN  TAXATION 

chief  functions  of  this  income  tax  is  to  preserve  the  equilib- 
rium of  the  budget.  So  again,  certain  taxes  on  commodities 
are  often  utilized  for  this  purpose.  The  single  tax  on  land 
values,  however,  is  utterly  inelastic ;  for  since,  according  to 
the  theory  of  its  advocates,  the  total  rental  value  is  to  be 
taken  from  the  landowners,  the  single  tax  cannot  be  increased. 
Where  nothing  has  been  left,  nothing  more  can  be  taken. 
In  the  case  of  an  emergency  there  would,  therefore,  be  no 
possibility  of  increasing  the  revenues.  Even  if  the  total 
land  value  were  not  taken,  it  would  still  remain  true  that  a 
direct  tax  on  the  unimproved  value  of  land  is  far  more 
inelastic  than  other  taxes ;  for  when  the  supply  is  constant 
and  the  price  is  fixed  only  by  conditions  of  demand,  the  sell- 
ing value  as  well  as  the  rental  value  is  subject  to  far  more 
fluctuations  than  in  commodities  where  the  supply  may  be 
diminished  at  pleasure.  Furthermore,  as  we  have  seen,  a 
single  tax  of  any  kind,  whether  on  lands  or  on  anything 
else,  would  be  less  elastic  than  a  system  of  taxes  where  one 
may  be  played  off  against  the  other.  Lack  of  elasticity  is 
a  serious  defect  in  the  single  tax. 

Another  fiscal  weakness  of  the  single  tax  is  that  it  inev- 
itably intensifies  the  inequalities  resulting  from  unjust 
assessments.  We  all  know  how  difficult  it  is  to  carry  out 
laws  which  provide  for  equal  assessments.  Under  the  real 
estate  tax  in  the  United  States,  for  example,  the  assessors 
are  usually  sworn  to  rate  the  property  at  its  actual  or  selling 
value,  and  the  selling  value  of  a  piece  of  land  or  of  a  house  is 
comparatively  easy  to  ascertain;  yet  it  is  notorious  that  in  no 
two  counties,  nay  even  in  no  two  adjoining  pieces  of  property, 
is  the  standard  of  assessment  the  same.  Thus  the  report  of 
the  Iowa  Revenue  Commission  of  1893,  states  that  realty  in 
Iowa  was  assessed  at  from  seventeen  to  sixty  per  cent  of  the 
true  value.  It  is  well  known,  too,  that  in  the  city  of  Chicago 
adjacent  plots  of  real  estate  are  assessed  at  percentages  of 
ridiculously  varying  degree.  Now,  it  is  manifestly  not  so  easy 
to  assess  the  land  values, — that  is,  the  bare  value  of  the  land 
irrespective  of  all  improvement, —  as  it  is  to  assess  the  selling 


THE  SINGLE  TAX  75 

value  of  a  piece  of  real  estate.  For  instance,  an  acre  of 
agricultural  land  near  a  large  town  may  be  worth  $200;  but 
if  used  for  truck-farming,  considerably  more  than  $200  may 
have  been  expended  on  it  during  the  last  century  or  two. 
Who  can  tell  how  much  of  the  $200  present  value  is  the  value 
of  the  bare  land  and  how  much  is  to  be  assigned  to  the  labor 
expended  ?  Under  the  present  method  we  have  at  least  a 
definite  test  —  the  selling  value ;  under  the  new  method  we 
should  have  no  test  at  all.  There  is  every  likelihood,  there- 
fore, that  the  difficulties  of  the  present  situation  would  be 
intensified.  Moreover,  under  the  present  system,  inadequate 
as  it  is,  there  is  always  a  chance  that  the  imperfect  enforce- 
ment of  a  particular  tax  law  will  be  offset  by  the  assessment 
of  other  taxes,  direct  or  indirect.  Under  the  single  tax  not 
only  would  there  be  more  difficulty  than  at  present  in 
making  the  original  assessment,  but  the  inequality  of  the 
assessment,  which  is  inseparable  from  all  democratic  methods, 
would  be  seriously  intensified  by  the  very  fact  that  it  is  a 
single  tax. 

2.    Political  Defects. 

The  adoption  of  the  single  tax  means  the  total  abolition 
of  all  custom  houses  and  import  duties ;  it  means  that  there 
can  be  no  such  thing  as  a  system  of  protection  to  home  indus- 
try. Many  would,  it  is  true,  favor  the  single  tax  precisely 
on  this  account ;  but  there  are  some  self-styled  "  single- 
taxers  "  who  believe  that  as  a  matter  of  national  policy  there 
.is  a  justification  for  import  duties.  Whatever  we  may  think 
of  the  economic  justification  of  import  duties,  it  must  be 
recognized  that  they  may  sometimes  form  an  important 
political  weapon.  It  is  clear,  however,  that  leaving  the  ques- 
tion of  protection  entirely  aside,  the  adoption  of  the  single 
tax  will  make  it  impossible  to  utilize  import  duties  for  politi- 
cal, fiscal  or  other  purposes. 

In  the  second  place,  the  adoption  of  the  single  tax  would 
render  it  impossible  for  governments  to  utilize  the  taxing 


76  ESSAYS  IN  TAXATION 

power  as  a  political  or  social  engine  in  any  other  way.  For 
instance,  the  United  States  government  now  imposes  a  tax 
on  the  circulation  of  state  bank-notes  in  order  to  bring  about 
certain  desirable  results  in  the  currency  situation.  Under 
the  single  tax  this  would  be  impossible.  Again,  the  United 

/  States  government  levies  a  high  tax  on  opium,  not  for  the 
purpose  of  revenue,  but  in  order  to  discourage  the  consump- 

\  tion  of  opium  ;  and  it  also  assesses  a  tax  on  oleomargarine,  pri- 
marily in  order  to  ensure  the  purity  of  butter.  Under  the 
single  tax,  all  such  efforts  would  be  impossible.  Finally,  to 
mention  only  one  other  example,  one  of  the  chief  methods  of 
dealing  with  the  drink  question  is  through  the  imposition  of 
high  liquor  licenses,  the  fiscal  importance  of  which  is  only 
secondary.  Under  the  single  tax  we  should  be  prevented 
from  attacking  the  problem  in  that  way.  Governments  have 
always  made  use  of  the  taxing  power  to  regulate  and  to 
destroy,  as  well  as  to  yield  a  revenue.  Were  the  single  tax 
to  be  adopted,  this  salutary  power  would  be  entirely  taken 
away. 

Thirdly,  the  political  results  of  the  single  tax  would  be 
dangerous  in  another  way.  So  far  as  there  is  any  truth 
in  the  assertion  that  in  a  democracy  it  involves  some  risk  for 
a  small  class  to  pay  the  taxes  and  for  a  large  class  'to  vote 
them,  it  is  especially  applicable  to  the  single  tax.  Since 
the  "  unearned  increment "  would  flow  of  itself,  silently  and 
noiselessly  into  the  treasury,  there  would  be  no  need  of  a 
budget;  and  the  sense  of  responsibility  in  the  citizens  would 
be  perceptibly  diminished.  It  is  well  known  that  liberty 
has  been  intimately  bound  up  with  the  contest  against 
unjust  taxation ;  the  constitutional  history  of  England  is 
to  a  large  extent  a  history  of  the  struggle  of  the  people  to 
gain  control  of  the  treasury ;  the  American  Revolution  was 
precipitated  by  a  question  of  taxation  ;  the  French  Revolu- 
tion was  brought  about  primarily  by  the  fiscal  abuses  of  the 
ancien  regime.  To  take  away,  then,  from  the  vast  majority  of 
citizens  the  sense  of  their  obligation  to  the  government,  and 
to  divorce  their  economic  interests  from  those  of  the  state, 


THE  SINGLE  TAX  77 

would,  especially  in  a  democracy  like  that  of  America,  be 
fraught  with  serious  danger. 

3.    Ethical  Defects. 

The  advocates  of  the  single  tax  love  to  base  their  arguments 
on  the  ground  of  justice.  In  this  they  are  certainly  wise ; 
for  even  though  all  other  arguments  were  in  its  favor,  if 
the  justice  of  the  single  tax  could  be  successfully  impugned, 
it  would  be  foredoomed  to  failure.  Let  us  then  ascertain 
whether  it  is  indeed  true  that  the  single  tax  is  an  equitable 
method  of  taxation. 

The_two_great^anons  of  justice  in  taxation  are  univer- 
sality and  uniformity  or  equality.  If  anything  has  been 
gained  by  the  revolutions  of  the  eighteenth  century  and  by 
the  growing  public  conscience  of  the  nineteenth,  it  is  a 
recognition  of  the  fact  that  all  owe  a  duty  to  support  the 
state,  that  a  system  of  wholesale  exemptions  is  iniquitous, 
and  that  all  taxpayers  should  be  treated  according  to  the 
same  standard.  Judged  by  any  or  all  of  these  tests,  can  it 
be  seriously  maintained  that  the  single  tax  is  an  equitable 
form  of  taxation  ? 

Toward  the  close  of  the  eighteenth  century,  there  was  a 
school  of  French  writers,  the  Physiocrats,  who  first  advo- 
cated the  plan  of  a  single  tax  on  land  —  the  famous  impot 
unique.  It  was  considerably  talked  about  until  Voltaire 
turned  his  caustic  pen  upon  them  and  wrote  the  cele- 
brated essay  UHomme  d  quarante  6cu$  —  the  man  of  forty 
crowns  — ,  one  of  the  most  effective  bits  of  mordant  sar- 
casm ever  written.  Voltaire  pictured  the  position  of  the 
French  peasant  toiling  laboriously,  amid  conditions  of 
unspeakable  distress,  but  succeeding  in  getting  from  the 
soil  a  product  equivalent  to  forty  crowns.  The  tax-gatherer 
comes  along,  finds  that  the  peasant  can  manage  to  keep 
body  and  soul  together  on  twenty  crowns,  and  takes  away 
the  other  twenty.  Then  the  peasant  meets  an  old  acquaint- 
ance, originally  poor,  who  has  been  left  a  fortune  of 


78  ESSAYS  IN  TAXATION 

400,000  crowns  a  year  in  money  and  securities.  He  rolls 
along  the  highway  in  a  six-horse  chariot,  with  six  lackeys, 
each  with  double  the  peasant's  income  ;  his  maitre  tfhdtel 
gets  2000  crowns  salary  and  steals  20,000 ;  his  mistress 
costs  80,000  crowns  a  year.  "  You  pay  of  course  half  your 
income,  200,000  crowns,  to  the  state  ? "  asked  the  peasant. 
"  You  are  joking,  my  friend,"  answered  he,  "  I  am  no  landed 
proprietor  like  you.  The  tax-gatherer  would  be  an  imbecile 
to  assess  me  ;  for  everything  I  have  comes  ultimately  from 
the  land,  and  somebody  has  paid  the  tax  already.  To  make 
me  pay  would  be  intolerable  double  taxation.  Ta-ta,  my 
friend  ;  you  just  pay  your  single  tax,  enjoy  in  peace  your 
clear  income  of  twenty  crowns  ;  serve  your  country  well,  and 
come  once  in  a  while  to  take  dinner  with  my  lackey.  Yes, 
yes,  the  single  tax,  it  is  a  glorious  thing."  This  little  pict- 
ure, perhaps,  did  more  than  all  else  to  nullify  the  efforts  of 
the  Physiocrats. 

We  shall  later  discuss  the  effects  of  the  modern  single 
tax  on  the  farmer,  but  the  principle  underlying  Voltaire's 
thought  is  equally  applicable  here.  On  what  grounds  of 
morals  or  justice  shall  the  landowner  be  singled  out  for 
taxation  ? 

We  have  seen  that  the  theory  of  natural  rights  is  not  ade- 
quate ;  we  have  learned  that  the  principle  of  opportunity 
does  not  correctly  portray  the  relations  of  the  individual 
to  the  state.  Even  if  the  theory  of  unearned  increment 
were  true  it  would  not  by  any  means  justify  the  single  tax 
on  land  values.  In  the  first  place,  land  values  do  not 
always  or  necessarily  increase  ;  and,  secondly,  there  are  a 
great  many  other  values  which  do  increase,  and  which 
increase  mainly  by  the  operation  of  forces  which  the  owner 
of  the  property  neither  creates  nor  controls. 

Land  values  do  not  always  or  necessarily  increase.  Thus, 
in  the  testimony  given  before  the  Rapid  Transit  Commission 
in  the  city  of  New  York  in  March,  1895,  one  of  the  wit- 
nesses spoke  of  several  long  avenues  being  lined  with 
the  graves  of  property-owners.  What  did  he  mean  ? 


THE  SINGLE  TAX  79 

Simply  that  ten,  or  twenty,  or  thirty  years  ago,  certain 
individuals  had  invested  in  the  land,  in  hopes  of  a  rise  in 
value,  just  as  people  invest  in  bonds  or  stocks  or  other 
securities.  Instead  of  values  rising,  however,  they  remained 
stationary  or  even  decreased  ;  while,  in  the  meantime,  the 
accumulated  taxes  and  assessments  upon  this  non-productive 
property  completely  ruined  many  of  the  investors.  It  is 
indeed  true  that  in  most  growing  cities  land  values  in  certain 
localities  will  increase  ;  but  it  is  equally  true  that  there  are 
always  sections  in  such  cities  where,  for  obvious  reasons, 
land  values  decrease.  These  facts  are  familiar  to  all  observ- 
ers in  large  cities.  Moreover,  in  some  European  countries 
the  rental  value  of  the  land,  as  a  whole,  is  less  to-day  than  it 
was  a  few  decades  ago.  The  tax  on  land  value  would  there 
yield  only  a  precarious  revenue,  since  there  has  been  no 
unearned  increment,  but  a  decrement. 

More  important  still  is  the  fact  that  even  though  land 
values  often  increase,  similar  increase  in  value  is  not  by  any 
means  confined  to  land.  Let  us  ask  any  one  whose  mind  is 
not  befogged  by  the  mist  of  erroneous  enthusiasm  :  Who 
are  the  rich  men  of  the  world  to-day  ?  How  has  by  far 
the  greater  part  of  our  huge  individual  fortunes  been 
acquired  ?  Let  us  study  the  way  in  which  men  have  become 
millionaires,  especially  in  the  United  States.  The  usual 
cause  is  some  fortuitous  conjuncture  of  events,  some  chance 
happening  due  to  no  one's  labor,  but  to  a  turn  in  the 
wheel  of  fortune  —  call  it  speculation,  call  it  luck,  call  it 
by  any  name  we  will.  How  have  most  of  the  fortunes  in 
Wall  Street  been  made  ?  Who  is  responsible  for  the  in- 
creased value  of  investments  ?  Who  can  say  that  the  suc- 
cessful manager  of  the  ring,  the  corner,  the  pool  and  the 
trust  has  worked  out  his  salvation  through  his  own  indus- 
try ?  Land  speculation  is  only  a  part,  and  a  very  small 
part,  of  the  sum  total.  If  it  be  claimed  that  the  fortunate 
speculator  deserves  his  fortune  because  of  his  sagacity  and 
foresight,  why  deny  these  attributes  to  the  landowner  ?  It 
can,  of  course,  not  be  denied  that  wealth  has  been  acquired 


80  ESSAYS  IN  TAXATION 

by  thrift  and  industry;  but  it  remains  true  that  most 
of  the  very  large  fortunes  that  strike  the  common  observer 
are  due  to  these  incalculable  turns  in  the  wheel  of  fortune, 
and  that  the  so-called  unearned  increment  of  land  values 
forms  only  a  small  share  of  these  total  gains. 

It  must  not  be  forgotten  that  the  modern  age  is  the  age 
of  speculation,  differing  from  former  periods  in  that  "time 
speculation  "  has  supplanted  "  place  speculation."  No  econo- 
mist would  to-day  venture  to  deny  that  speculation  has  its 
legitimate  uses,  and  that  the  stock  and  produce  exchanges 
of  the  present  day  play  an  indispensable  part  in  the  econ- 
omy of  our  complex  industrial  society.  But  speculation  is 
largely  responsible  for  modern  fortunes  ;  and  land  specu- 
lation is  simply  a  species  in  the  larger  genus.  Value  is 
a  social  phenomenon,  not  an  individual  phenomenon.  A 
house  in  a  desert  is  worth  nothing  ;  a  house  in  a  small 
town  is  worth  more  ;  a  house  in  a  large  city  is  worth  still 
more.  The  house  is  in  part  the  product  of  labor,  but  the 
greater  demand  increases  the  value.  A  newspaper  also  is 
more  profitable  in  a  city  than  in  a  village.  Thus,  if  social 
environment  gives  a  value  to  bare  land,  the  same  social 
environment  increases  the  demand  for  other  commodities. 
If  it  be  said  that  land  differs  from  other  things  in  that  it 
is  a  monopoly,  the  answer  "is  irresistible  that  if  there  is 
any  one  thing  which  distinguishes  the  modern  age,  it  is  the 
development  of  industrial  monopoly ;  we  live  in  a  period 
of  pools  and  trusts  and  economic  monopolies  of  all  kinds. 
So  important,  indeed,  have  these  become  that  modern 
economic  theory  has  been  compelled  to  supplement  the  old 
doctrine  of  value  which  was  based  on  the  assumption  of 
free  competition  by  a  newer  and  more  comprehensive  theory, 
especially  applicable  to  all  these  modern  forms  of  monopoly 
price.  These  monopoly  profits  cannot  be  reached  by  a  tax 
on  land  values. 

On  what  possible  theory  of  justice,  then,  shall  we  tax  the 
man  who  has  invested  $100,000  in  land  which  the  next  year 
appreciates  fifty  per  cent ;  and,  on  the  other  hand,  exempt 


THE  SINGLE  TAX  81 

the  man  who  has  invested  $100,000  in  the  stock  of  the 
Sugar  Trust,  which  the  next  year  may  also  enhance  fifty 
per  cent?  Why  should  the  earnings  invested  in  land  be 
taxed  and  the  earnings  invested  in  the  Sugar  Trust  be 
wholly  untaxed?  Why  should  the  earnings  invested  in 
land  be  taxed  and  the  earnings  invested  in  any  railway 
bond  be  wholly  untaxed  ? 

It  might,  indeed,  be  claimed  that  the  railway  stockholder 
will  be  affected  by  a  tax  on  the  land  owned  by  the  corpora- 
tion :  but  it  is  difficult  to  see  how  the  railway  bondholder 
can  be  reached  by  any  tax  on  land  values  except  in  so  far 
as  the  ultimate  security  for  his  debt  may  be  affected.  As  the 
bonded  indebtedness  of  the  railways  to-day  far  exceeds  their 
capital  stock  it  appears  that,  even  in  the  case  of  these  indus- 
tries whose  increasing  values  are  largely  due  to  the  influence 
of  the  community,  the  majority  of  investors  would  scarcely 
be  touched.  In  the  great  mass  of  industries,  of  which  the 
Sugar  Trust  is  an  example,  where  the  land  owned  by  the  cor- 
poration is  of  exceedingly  small  consequence  as  compared 
with  its  other  assets,  it  is  plain  that  a  tax  on  land  values 
would  not  reach  even  the  stockholders  or  the  owners  proper. 
Almost  every  industry,  moreover,  is  dependent  for  its  in- 
creasing profits  upon  the  development  of  the  community, 
that  is,  upon  the  increasing  demand  for  the  product.  Land 
rises  in  value  because  there  are  more  people  who  want  to 
occupy  that  land  ;  the  earnings  of  the  Sugar  Trust  have 
increased  chiefly  because  there  are  more  people  who  want 
sugar.  In  each  case  the  increased  returns  are  due  primarily 
to  social  causes  ;  in  each  case  we  have  a  monopoly.  One  is 
a  natural  monopoly  and  the  other  is  an  economic  or  artificial 
monopoly  ;  but,  for  all  practical  purposes,  there  is  no  dis- 
tinction between  them.  To  confiscate  the  capital  invested 
in  land  with  the  chance  of  the  land  either  falling  or  rising 
in  value,  while  exempting  absolutely  the  capital  invested  in 
corporate  or  industrial  securities,  is  but  a  travesty  of  justice. 
It  will  be  impossible  to  convince  the  common  people  that 
so-called  unearned  increments  are  confined  to  land.  As  a 


82  ESSAYS  IN  TAXATION 

matter  of  fact  the  "  unearned  increment "  of  land  is  only  one 
instance  of  a  far  larger  class. 

We  must,  on  the  contrary,  plant  ourselves  firmly  on  the 
basis  of  faculty  or  ability  to  pay.  So  far  as  a  man  receives 
special  opportunities  from  the  community,  which  undoubt- 
edly increase  his  ability  to  pay,  they  should  be  taken  into 
account  in  framing  any  scheme  of  taxation.  But  let  us 
not  single  out  one  special  opportunity,  because  it  strikes 
the  eyes  of  urban  observers,  while  we  neglect  all  the 
other  opportunities  which  are  equally,  or  almost  equally, 
the  result  of  social  forces.  The  single  tax  on  land  values 
is  unjust ;  first,  because  opportunity  is  not  the  only  ele- 
ment that  must  be  taken  into  account;  and,  secondly, 
because,  even  though  it  were,  revenues  from  land  are  by  no 
means  the  only  form  —  nay,  not  even  the  most  important 
form  —  of  the  results  of  special  opportunity.  The  single 
tax  is  unjust  because  it  is  exclusive  and  unequal. 

But,  even  though  the  single  tax  were  absolutely  just 
in  theory,  it  would  not  yet  follow  that  it  would  be  prac- 
ticable. Let  us,  therefore,  come  to  the  final  part  of  our 
inquiry. 

4.    Economic  Defects. 

These  considerations  which  have  often  been  overlooked, 
may  be  discussed  from  three  points  of  view :  first,  the 
economic  effect  of  the  single  tax  on  poor  and  new  commun- 
ities ;  second,  the  economic  effect  on  farmers  and  the  agri- 
cultural interests  in  general ;  third,  the  economic  effect  on 
rich  communities. 

In  the  first  place,  what  would  be  the  effect  on  poor  and 
new  communities? 

When  an  American  farmer  goes  to  the  virgin  soil  of  the 
Northwest  and  stakes  out  his  farm,  he  finds  virtually  no  land 
value  at  all ;  land  can  be  secured  by  any  one  on  the  pay- 
ment of  a  merely  nominal  sum.  The  only  property  of  these 
new  farming  communities  consists  of  the  log  cabins  erected  011 


THE  SINGLE  TAX  83 

the  land;  of  the  tools,  implements  and  beasts  of  burden  used 
for  tilling  the  land;  and  of  the  personal  effects  and  money 
that  are  in  many  cases  brought  along  by  the  farmers.  The 
great  mass  of  their  possessions,  therefore,  consists  of  per- 
sonalty. In  so  far  as  there  is  any  real  property  at  all,  it 
is  only  to  an  exceedingly  slight  extent  composed  of  land 
values.  There  is  practically  no  land  value.  How  then,  it 
may  be  asked,  can  taxes  be  raised  in  this  new  community  ? 
How  can  the  roads  be  laid  out,  the  schoolhouses  be  erected, 
and  the  other  improvements  be  effected?  Since  land  values 
are  non-existent,  a  tax  on  zero  must  be  zero.  Even  if  any 
land  values  exist,  the  total  confiscation  of  them  would  not 
suffice  to  defray  any  considerable  part  of  the  necessary  ex- 
penditures. For  proof,  take  any  of  the  assessors'  reports  in 
the  new  American  states,  and  it  will  be  found  that,  contrary 
to  the  conditions  of  the  rest  of  the  country,  the  assessed  per- 
sonal property  far  exceeds  in  value  the  total  assessed  real 
estate.  For  instance,  in  1890  personalty  was  to  total  realty 
in  Montana  as  58  to  55  millions  of  dollars,  in  Wyoming  as 
20  to  13  millions,  in  New  Mexico  as  28  to  15  millions,  in 
Arizona  as  18  to  10  millions.  Compare  these  figures  with 
the  older  sections,  as  New  York  or  Pennsylvania,  where  the 
proportion  was  as  382  to  3404  millions  and  618  to  2042 
millions  respectively.1  If  we  are  to  abolish  not  only  the  tax 
on  personalty,  but  all  that  part  of  the  tax  on  realty  which 
is  not  drawn  from  land  values,  it  can  easily  be  seen  how 
impossible  it  would  be  to  carry  on  government  in  these  sec- 
tions. A  tax  on  the  land  values  would  be  lamentably 
inadequate. 

What  has  been  said  of  new  communities  applies  almost 
equally  well  to  poor  communities,  that  is,  to  communities  made 
up  largely  or  almost  entirely  of  farm  lands  and  of  an  agricult- 
ural population.  The  "  single-taxers  "  themselves  claim  that 
land  values  amount  to  practically  nothing  in  the  farming 
districts.  We  shall  see  below  the  fallacy  in  this  general 

1  These  figures  are  taken  from  the  census  reports  of  1890.  See  Abstract 
of  the  Eleventh  Census:  1890  (1894),  p.  195. 


84  ESSAYS  IN  TAXATION 

contention ;  but  so  far  as  the  community  is  a  poor  one 
there  is  undoubted  truth  in  the  statement  that  land  values 
are  trivial.  If  this  is  true,  how  can  the  expenses  be  de- 
frayed by  a  single  tax  on  land  values?  In  the  testimony 
recently  taken  before  the  tax  commission  of  Massachusetts, 
one  of  the  single-taxers  who  was  testifying  as  to  the  situa- 
tion in  certain  rural  townships  was  asked  the  question : 
How  will  it  be  possible  for  this  poor  town,  in  which  there  is 
very  little  land  value,  to  raise  its  taxes  ?  The  witness  was 
compelled  to  reply  that  it  would  be  impossible  for  the  com- 
munity to  do  so,  and  he  suggested  that  the  expenses  of  the 
poor  communities  should  be  defrayed  in  large  part  from  the 
revenues  of  the  rich  communities.1 

This  remedy  is  somewhat  visionary;  for  with  the  Ameri- 
can theories  of  local  government,  it  would  be  almost  impos- 
sible to  induce  certain  sections  in  the  community  to  assume 
the  burdens  of  other  sections.  We  are  all  acquainted  with 
the  continual  bickerings  in  our  state  taxation,  due  to  the 
efforts  of  the  richer  counties  to  escape  paying  more  than 
their  proportion  of  the  general  state  taxes ;  and  we  have 
recently  seen  the  discontent  aroused  by  an  attempt  in  the 
shape  of  the  federal  income  tax  to  make  certain  wealthy 
sections  of  the  country  pay  the  larger  part  of  the  revenue 
of  the  national  government.  Where  these  efforts  have  given 
rise  to  so  much  dissatisfaction,  it  is  obviously  out  of  the 
question  to  suppose  that  the  purely  local  expenses  of  any 
community  will  ever  be  defrayed  by  the  efforts  of  other 
communities.  In  local  matters,  at  least,  every  county  and 

1  Hearings  relating  to  Taxation,  1893,  pp.  185-188.  The  committee  in 
its  final  report  states  :  "  Even  Henry  George  admitted  a  few  years  ago  [in  an 
address  at  Boston,  Feb.  22,  1889]  that  if  his  scheme  were  put  into  operation 
it  would  cause  the  savings  banks  and  life  insurance  companies  to  fail,  and  that 
in  an  agricultural  community  it  might  be  difficult  to  raise  the  money  thought 
to  be  needed  for  municipal  wants.  But  as  a  people  could  only  have  what  the 
plan  would  furnish,  they  must  economize  and  bring  their  wants  within  their 
means.  This  means,  among  other  things,  poorer  schools  and  libraries,  and 
therefore  a  more  limited  education  for  the  young,  and  a  less  tender  care  of 
the  aged  and  helpless  who  are  cared  for  in  our  charitable  institutions." 
Report  of  the  Joint  Special  Committee  on  Taxation,  1894,  p.  38. 


THE  SINGLE  TAX 


85 


town  must  stand  on  its  own  feet;  and  if  the  single  tax  is 
unable  to  defray  even  the  local  expenses  of  a  poor  com- 
munity, not  to  speak  of  its  share  of  general  state  or  federal 
expenses,  it  is  clearly  beyond  the  realm  of  practical  politics. 
In  poor  communities,  as  well  as  in  new  communities,  the 
single  tax  would  be  an  impossibility. 

Let  us  consider,  next,  what  would  be  the  effects  of  the 
single  tax  on  farmers  in  general.  One  of  the  claims  of  the 
advocates  of  the  system  is  that  it  would  relieve  the  farming 
population  of  the  burden  of  taxes,  now  weighing  upon  them. 
A  careful  consideration  of  the  facts  shows,  however,  that 
this  claim  is  unfounded,  and  that,  on  the  contrary,  the  only 
result  of  the  single  tax  would  be  to  make  the  farmers  pay 
more  than  they  are  paying  to-day.  This  can  be  proved  by 
recent  statistics. 

In  only  a  few  states  is  a  distinction  made  in  the  assess- 
ments between  land  and  improvements  on  land.  Let  us 
take,  as  a  typical  instance,  Ohio  county,  in  West  Virginia, 
in  which  the  city  of  Wheeling  is  situated.  In  the  auditor's 
report  for  1892,  we  find  the  following  figures :  — 


PEOPORTION 
OF  OHIO 
COUNTY. 
Per  cent. 


Value  of  buildings  on  lots, 
Value  of  buildings  on  lands, 

Total  value  of  buildings, 

Value  of  town  lots  without  build- 
ings, 

Value  of  land  without  buildings, 

Total  value  of  all  land  without 
buildings, 

Total  value  of  lands,  lots  and 
buildings, 

Value  of  personalty, 

Present  total  assessments, 

Population, 


OHIO  COUNTY.  ENTIRE  STATE. 

$8,554,010  $22,840,511 
671,795  14,371,855 

$  9,225,805  $  37,212,366         25 


4,409,152 
1,678,962 


14,453,321 
95,771,281 


$6,088,114        $110,224,502 


15,313,919 

6,187,710 

21,501,629 

41,000 


147,685,972 

61,707,093 

198,958,920 

763,000 


12 


In  other  words,  whereas  Ohio  county  now  pays  ten  and 
one-half  per  cent  of  all  taxes,  and  would  pay  about  the  same 


86  ESSAYS  TN  TAXATION' 

if  real  estate  alone  were  taxed,  if  the  single  tax  were  intro- 
duced it  would  pay  only  five  and  one-half  per  cent  of  the 
total  taxes,  or  about  one-half  as  much  as  at  present.  If  the 
large  towns  would  pay  so  much  less,  of  course  the  farming 
districts  would  have  to  pay  so  much  more.  The  improve- 
ments in  the  towns  are  worth  more  than  the  value  of  the 
bare  land  ;  while  in  the  country  districts  the  reverse  is  true. 
As  another  example  let  us  take  California.  In  the  comp- 
troller's report  for  1893,  we  find  the  following  figures  :  — 


COUNTY. 

VALUE  OF  REAL 
ESTATE. 
(i.e.  bare  land.) 

VALUE  or  IMPROVE- 
MENTS ON  REAL 

ESTATB. 

RATIO  or  LAND 
VALUES  TO  TOTAL 
REAL  ESTATE. 
Per  cent. 

Colusa, 

9  10,649,318 

$1,283,265 

89 

Merced, 

11,222,179 

1,037,103 

92 

Tulare, 

17,258,512 

2,327,705 

88 

San  Francisco, 

193,872,645 

82,584,775 

70 

Total  state, 

757,980,207 

242,388,163 

76 

We  thus  see  that  while  in  the  city  of  San  Francisco  im- 
provements equal  thirty  per  cent  of  the  total  real  estate 
value,  in  some  of  the  country  districts  improvements  are 
only  ten  or  fifteen  per  cent  of  the  total.  Taking  the  state 
as  a  whole,  land  values  equal  seventy-six  per  cent  of  all  real 
estate,  while  in  San  Francisco  land  values  are  only  seventy 
per  cent  of  all  real  estate.  To  levy  the  single  tax  would, 
therefore,  make  San  Francisco  pay  less,  and  some  of  the 
country  counties  far  more,  than  at  present. 

Again,  let  us  call  attention  to  the  report  of  the  Commission 
on  Valuation,  made  in  1892  to  the  Pennsylvania  Tax  Con- 
ference, which  is  probably  the  most  careful  attempt  yet  made 
to  distinguish  land  values  from  improvements.  We  find  the 
following  figures :  — 

VALUE  OP  LAND.  VALUE  OF  IMPROVEMENTS. 

Philadelphia  county,  $357,007,936  $646,244,284 

Purely    agricultural    land   in    ] 

Philadelphia  county,  21>610'429  3'813'605 

Entire  state,  all  land,  1,881,334,522  1,754,525,949 

Entire  state,  agricultural  land,  725,485,439  245,494,072 

The  proportion  of  land  values  to  total  valuation  of  all 
property  is,  in  the  county  of  Philadelphia,  thirty-six  per 


THE  SINGLE  TAX  87 

cent ;  in  the  agricultural  counties  of  Sullivan  and  Greene, 
eighty-one  per  cent  and  seventy-five  per  cent,  respectively ; 
and  in  the  whole  state,  fifty-two  per  cent.  The  Commission 
concludes :  "As  a  rule,  in  agricultural  counties  the  land 
values  are  the  greatest,  as  would  be  expected  ;  while  in 
manufacturing  counties  and  those  having  large  cities,  the 
value  of  the  improvements  is  equal  to  that  of  the  land,  or 
greater." 

Let  us  now  choose  some  Western  states.  In  the  report 
of  the  auditor  of  Colorado  for  1894  we  find  the  following 
figures  :  — 

Value  of  agricultural  and  grazing  land,  irrespec- 
tive of  improvements $  36,907,810 

Value  of  improvements 7,492,022 

Value  of  town  and  city  land,  irrespective  of  im- 
provements    63,080,205 

Value  of  improvements 34,788,941 

In  other  words,  in  the  towns  improvements  constitute 
about  one-third  of  the  total  values  ;  whereas  in  the  country, 
improvements  are  only  about  one-sixth  of  the  total. 

As  to  Montana  we  find,  in  the  report  of  the  Board  of 
Equalization  for  1894,  the  following  figures  :  — 

Value  of  city  and  town  lots         ....  $29,362,764 

Value  of  improvements  on  same         .        .        .  15,156,115 

Value  of  land 17,493,680 

Value  of  improvements  on  same         .        .        .  7,287,887 

In  Lewis  and  Clarke  county,  the  home  of  the  largest 
city  in  the  state,  the  total  value  of  all  land  was  $  11,397,860  ; 
that  of  improvements,  $5,269,300.  In  some  of  the  agricult- 
ural or  grazing  counties,  however,  the  value  of  the  land  was 
far  higher  in  proportion  to  the  improvements;  in  Meagher 
county,  for  example,  land  was  $1,821,385,  while  improve- 
ments were  only  $629,054.  Most  striking  of  all,  in  this  very 
same  county,  in  the  case  of  agricultural  property,  the  figures 
were,  land  $1,218,474,  improvements  $266,824;  while  in  the 
town  lots  the  figures  were,  bare  land  $602,911,  improvements 
$362,375.  In  other  words,  not  only  are  improvements 


88  ESSAYS  IN  TAXATION 

proportionately  less  in  the  rural  counties,  but  even  in 
these  rural  counties  by  far  the  larger  proportion  of  the 
improvements  are  found  in  the  little  towns,  as  compared 
with  the  farming  or  grazing  land  proper. 

In  the  state  of  Washington,  the  State  Board  of  Equaliza- 
tion agreed  on  the  following  figures  for  1893  :  — 

Value  of  land  exclusive  of  improvements    .        .  $87,527,472 

Value  of  improvements 8,970,908 

Value  of  city  and  town  lots         ....  101,889,377 

Value  of  improvements 29,585,930 

In  Utah,  Salt  Lake  county,  the  seat  of  the  chief  city, 
assessed,  in  1893,  real  estate,  exclusive  of  improvements,  at 
$31,347,670 ;  improvements,  at  $9,483,141.  In  rural  coun- 
ties like  Rich  county  and  Cache  county,  the  figures  were, 
in  the  one  case,  realty  $527,666,  improvements  $81,445 ; 
in  the  other  case,  realty  $3,771,810,  improvements  $915,614. 
Here  again,  the  more  densely  settled  the  township,  the 
greater  in  proportion  is  the  value  of  the  improvements. 

Finally,  in  North  Dakota,  the  State  Board  of  Equalization 
has  fixed  the  valuation  for  1894  at  these  remarkable  figures: 

Value  of  land  exclusive  of  improvements    .         .  $55,887,303 

Value  of  improvements 2,608,016 

Value  of  town  or  city  lots 4,400,642 

Value  of  improvements  thereon  ....  4,756,331 

In  all  these  cases  —  and  they  might  be  multiplied  ad  infini- 
tum  —  it  is  seen  that  the  value  of  the  improvements  is,  on  the 
whole,  greater  in  the  urban  than  in  the  rural  districts.  To 
many  this  will  be  a  surprise,  because  they  are  apt  to  be  blinded 
by  the  immediate  facts  about  them.  The  single  tax  advocate 
generally  lives  in  the  city,  and  sees  before  him  a  city  lot, 
each  foot  of  which  will  sell  for  hundreds  or  perhaps  thou- 
sands of  dollars.  The  town  lot,  he  is  apt  to  exclaim,  is 
worth  hundreds  of  times  as  much  as  a  piece  of  land  in  the 
agricultural  districts.  This  is  perfectly  true;  but  it  proves 
nothing  as  to  the  comparative  ability  of  their  owners  to 
pay  taxes  because  it  overlooks  a  point  of  the  greatest  im- 


THE  SINGLE  TAX  89 

portance.  When  we  compare  urban  with  agricultural  land 
values,  we  do  not  compare  foot  with  foot,  but  total  units 
with  total  units.  Thus,  an  acre  of  land  in  New  York  City 
may  be  worth  a  thousand  times  as  much  as  an  acre  of  land  in 
the  country;  but  it  must  be  remembered  that  there  are  many 
thousand  times  as  many  acres  in  the  country  as  there  are 
acres  in  New  York  City.  A  lot  in  New  York  may  be  worth 
ten  thousand  dollars,  but  a  farm  of  five  hundred  acres  in 
the  country  may  also  be  worth  ten  thousand  dollars,  exclu- 
sive of  improvements.  We  must,  therefore,  compare,  not 
the  value  per  foot  in  the  New  York  lot  with  the  value  per 
foot  in  the  country  farm,  but  we  must  compare  the  value  of 
the  New  York  lot  with  the  value  of  the  country  farm.  The 
farmer  who  has  paid  ten  thousand  dollars  for  his  farm,  and 
has  then  proceeded  to  improve  and  cultivate  it,  will  not  be 
satisfied,  when  the  assessor  taxes  him,  and  exempts  all  the 
business  men,  house-owners  and  security  holders  in  the 
adjoining  village ;  he  will  not  be  satisfied  with  the  statement 
that  the  owner  of  a  ten-thousand-dollar  lot  in  New  York 
City  pays  a  hundred  times  as  much  per  front  foot.  He  will 
be  apt  to  reply  that  it  makes  no  difference  to  him  whether 
the  New  Yorker's  ten  thousand  dollars  is  taken  away;  but 
that  he  objects  to  his  own  ten  thousand  dollars  being  taken 
away,  while  his  neighbors  in  the  village,  who  are  far  richer 
than  he,  pay  no  taxes  at  all.  In  short,  while  attention  is 
directed  to  the  fact  that  land  values  are  undoubtedly  less  per 
acre  in  the  country  than  in  the  city,  it  is  forgotten  that  the 
number  of  acres  in  the  country  is  so  many  times  larger  than 
the  number  of  acres  in  the  cities  that  the  total  land  values  in 
the  country  will  form  a  large  part  of  the  whole.  Moreover, 
we  have  seen  that  the  value  of  improvements  is  greater  in 
the  towns  than  in  the  country.  In  the  country  the  farm- 
house is  built  for  five  hundred  dollars  ;  in  the  city  the  fine 
stone  mansion  or  steel  business  edifice  is  erected  at  a  cost  of 
thousands  or  hundreds  of  thousands  of  dollars.  If,  there- 1 
fore,  all  improvements  were  to  be  entirely  exempted,  the  V^ 
only  result  of  a  tax  on  land  values  would  be  to  make  the 


90  ESS AyS  IN  TAXATION 

farmers  pay  more  than  they  do  at  present.  It  is  not 
denied  that  as  between  the  general  property  tax  as  actually 
administered  and  a  tax  on  real  estate  only,  the  farmer 
would  be  benefited  by  the  adoption  of  the  latter.  For 
personal  property,  as  has  been  elsewhere  explained,1  is 
assessed,  chiefly  in  the  agricultural  communities.  The 
remedy,  however,  consists  not  in  taxing  only  real  estate,  but 
in  striving  to  reach  the  abilities  of  the  owners  of  personal 
property  by  some  other  method  than  that  of  the  antiquated 
general  property  tax.  But  even  assuming  that  this  reform 
cannot  be  effected,  what  the  farmers  would  gain  by  the  aboli- 
tion of  the  personal  property  tax,  they  would  lose  and  far 
more  than  lose,  as  we  have  seen,  by  the  total  exemption  of 
all  improvements. 

No  wonder  the  farmers  realize  that  this  will  ruin  them. 
Immunity  from  indirect  taxes  would  be  dearly  purchased  at 
such  a  price;  for  it  would  result  in  the  destruction  of  the  one 
class  above  all  others  upon  which  our  prosperity  rests  —  the 
class  of  independent  small  farmers.  As  long  as  the  United 
States  remains  pre-eminently  an  agricultural  community,  it  is 
not  likely  that  the  single  tax  will  become  a  practical  question. 

Thirdly,  and  finally,  let  us  consider  the  economic  effects 
of  the  single  tax  in  rich  urban  communities. 

It  is  contended  by  the  single-taxers,  with  special  reference 
to  the  advantages  claimed  as  likely  to  accrue  to  the  tenement- 
house  population  of  the  large  cities,  that  the  introduction  of 
their  system  would  bring  about  the  social  millennium.  It  is 
supposed  that  if  we  abolish  the  tax  on  improvements,  that  is, 
on  houses,  the  vacant  lots  will  be  built  over  as  if  by  magic, 
rents  will  fall,  the  wages  of  the  workmen  will  rise,  and  a 
period  of  general  prosperity  will  be  ushered  in. 

It  may  be  asked,  in  the  first  place,  where  all  this  addi- 
tional capital  which  is  to  be  invested  in  houses  is  coming 
from.  There  is  no  fund  floating  about  in  the  air  which  can 
be  brought  to  earth  simply  by  the  imposition  of  the  single 

1  Supra,  p.  32. 


THE  SINGLE  TAX  91 

tax ;  the  amounts  to  be  laid  out  in  houses  must  be  taken 
from  the  capital  now  invested  in  some  other  form  of  pro- 
ductive enterprise.  The  amount  of  loanable  capital  in  the 
money  market  at  any  one  time  is  definitely  fixed.  Even 
deposits  in  banks  are  already  invested,  for  the  most  part, 
in  mortgages  or  in  corporate  securities;  that  is,  they  are 
already  utilized  for  productive  purposes.  What  is  put  into 
new  houses  will,  therefore,  simply  be  so  much  taken  away 
from  other  productive  employments. 

It  may  be  asked  next,  how  the  rents  of  our  tenement- 
house  population  will  be  reduced  ?  The  theory  that  a  tax  on 
houses  is  shifted  to  the  consumer  or  tenant  is  true  enough, 
provided  that  the  tax  be  exclusive  —  that  is,  provided  that 
nothing  be  taxed  except  houses.  If,  on  the  contrary,  the 
house  tax  is  simply  a  part  of  a  wider  system  of  taxation ;  if 
other  forms  of  property  are  assessed  like  investments  in  land 
and  in  personal  property ;  if  a  corporation  tax  is  imposed  to 
hit  the  investors  in  corporate  securities  ;  or  if  we  have  an 
income  tax  which  is  to  reach  general  profits, — in  all  these 
cases  the  very  conditions  of  the  theory  according  to  which  a 
house  tax  is  shifted  disappear.1  To  the  extent,  then,  that  the 
house  tax  is  not  a  single  tax,  the  tendency  for  it  to  be  shifted 
will  be  diminished.  The  only  result,  in  this  direction,  of  the 
single  tax  would  be,  as  a  matter  of  fact,  that  people  would 
pay  their  rent  to  the  state  instead  of  to  private  individuals. 
We  hear  a  great  deal  about  the  unoccupied  lands  held  for 
speculative  purposes  in  large  cities ;  but  it  may  safely  be 
affirmed  that  south  of  Forty-second  Street  in  the  city  of  New 
York — the  home  of  the  major  part  of  the  tenement-house 
population  —  not  one-fiftieth  of  one  per  cent  of  the  building 
lots  lie  idle,  and  of  these  some  lots  are  occupied  as  coal 
yards,  and  some  adjoining  factories  or  large  establishments  are 
used  for  storage  purposes.  How  then  would  the  single  tax 
relieve  the  inhabitants  of  the  slums  ?  They  will  not  go  to 
the  suburbs  where  there  is  an  abundance  of  land,  for  the  same 
reason  that  they  do  not  go  there  now.  Rent  in  the  suburbs 
1  See  The  Shifting  and  Incidence  of  Taxation  (2d  ed.),  pp.  243,  245. 


92  ESSAYS  IW  TAXATION 

is  at  present  considerably  less  than  in  the  slums,  which  are 
nevertheless  crowded.  The  average  workman  plainly  prefers 
to  be  near  his  work,  and  to  enjoy  the  social  opportunities  of 
contact  with  his  fellow-workmen,  evenings  as  well  as  day- 
time. Above  all,  he  cannot  afford  the  expenditure  of  time 
and  money,  necessary  for  conveying  the  various  members  of 
his  family  to  and  from  the  suburbs.  Even  assuming,  there- 
fore, that  there  was  some  magic  fund  to  cover  the  suburban 
lots  with  houses,  the  rents  in  the  slums  would  scarcely  be 
affected. 

Finally,  we  may  ask  how  the  wages  of  the  workmen  are  to 
be  increased  by  the  single  tax.  Wages  can  be  increased 
only  through  an  increase  of  capital  or  through  an  increase 
of  the  efficiency  of  the  laborer.  Taxation  in  itself  cannot 
accomplish  either  of  these  results.  To  turn  economic  rent 
over  to  the  state  cannot  increase  capital  one  whit,  nor  can  it 
augment  the  efficiency  of  the  laborer.  Not  only  can  the 
single  tax  have  no  influence  on  the  wages  of  labor,  but  as  we 
have  seen  it  cannot  decrease  the  rentals  of  the  tenement-house 
population.  The  whole  fair  dream  of  economic  felicity  thus 
resolves  itself  into  mere  mist,  into  mere  nothingness ;  the 
tenement-house  population  would  derive  as  little  advantage 
as  the  American  farmer  from  the  single  tax. 

So  far  as  there  is  any  truth  in  the  doctrine  that  land  in  or 
near  cities  is  largely  held  for  speculative  purposes,  the  diffi- 
culty can  be  met  by  the  enforcement  of  now  existing  laws. 
The  tax  laws  of  the  American  states  everywhere  instruct 
the  officials  to  assess  property  at  its  true  or  selling  value, 
but  it  is  notorious  that  unimproved  lots  are,  as  a  rule,  consid- 
erably undervalued  as  compared  with  those  on  which  improve- 
ments have  been  erected.  If,  then,  we  simply  enforce  the 
laws  as  they  exist,  it  will  be  far  more  difficult  for  any  one  to 
hold  land  on  speculation.  But  the  desired  purpose  may  be 
accomplished  without  invoking  the  aid  of  the  single  tax. 

Furthermore,  so  far  as  there  is  an  element  of  truth  in  the 
idea  of  unearned  increment  as  applied  to  urban  real  estate, 
the  problem  is  already,  to  a  large  extent,  solved  in  America 


THE  SINGLE  TAX  93 

by  the  system  of  special  assessments  which  takes  for  public 
purposes,  and  precisely  at  the  time  of  its  creation,  the  in- 
creased value  which  may  properly  be  said  to  be  due  to  any 
positive  action  on  the  part  of  the  community.  By  enforcing 
the  tax  laws  as  they  exist  to-day  and  by  extending  the  law 
of  special  assessments  to  all  the  cases  which  are  properly 
referable  to  the  principle  of  benefits,  we  shall  do  as  much  as 
is  under  existing  conditions  either  practicable  or  equitable. 


IV.    Conclusions. 

We  have  studied  the  single  tax  from  different  points  of 
view;  and  we  have  seen  that  it  is  defective  fiscally,  politically, 
morally  and  economically.  We  have  learned,  first,  that  it 
would  be  inelastic,  and  that  it  would  intensify  the  inequali- 
ties resulting  from  unjust  assessments ;  secondly,  that 
although  itself  proposed  chiefly  from  social  considerations  it 
would  prevent  the  government  from  utilizing  the  taxing 
power  for  other  social  purposes,  and  that  it  would  divorce 
the  interests  of  the  people  from  those  of  the  government ; 
thirdly,  that  it  would  offend  against  the  canons  of  universal- 
ity and  equality  of  taxation,  and  that  it  would  seriously 
exaggerate  the  difference  between  profits  from  land  and 
profits  from  other  sources ;  and  finally,  that  it  would  be 
entirely  inadequate  in  poor  and  new  communities,  that  it 
would  generally  have  an  injurious  influence  on  the  farmer, 
and  that  even  in  the  large  urban  centres  it  would  exempt 
large  sections  of  the  population  without  bringing  any  sub- 
stantial relief  to  the  poorer  classes. 

It  is  clearly  impossible  to  discuss  in  this  place  the  wider 
claim  of  the  single-taxers,  that  the  application  of  their 
scheme  would  introduce  the  social  millennium.  If  econo- 
mists thought  that  the  distinguished  single-tax  leader  had 
solved  this  problem,  they  would  enthrone  him  high  on  their 
council  seats;  they  would  reverently  bend  the  knee  and 
acknowledge  in  him  a  master,  a  prophet.  But  when  he 


94:  ESSAYS  IN  TAXATION 

comes  to  them  with  a  tale  that  is  as  old  as  the  hills  ;  when 
he  sets  forth  in  his  writings  doctrines  that  have  long  since 
been  refuted ;  when  in  his  enthusiasm  he  seeks  to  impose  a 
remedy  which  appears  to  them  as  unjust  as  it  is  one-sided, 
as  inconsistent  as  it  is  inequitable, —  they  have  a  right  to 
protest.  This  is  not  the  first  time  that  some  enthusiast  has 
supposed  that  he  has  discovered  a  world-saving  panacea. 
The  remedy  for  social  maladjustments  does  not  lie  in  any 
such  lopsided  idea ;  the  only  cure  is  the  slow,  gradual  evolu- 
tion of  the  moral  conscience  of  mankind.  We  cannot  solve 
the  labor  problem  by  any  rule  of  thumb.  Every  student  of 
history,  of  political  philosophy,  of  economics,  will  tell  us  that 
the  progress  of  the  race  has  been  slow  and  painful ;  that  the 
world  has  advanced  step  by  step;  and  that  each  successive 
step,  to  be  enduring,  must  be  founded  on  justice.  To  sup- 
pose for  a  moment  that  the  social  millennium  will  be  ushered 
in  by  any  one  sudden  change  —  even  were  the  change  not  so 
lamentably  inadequate  as  the  one  above  discussed  —  is  an 
evidence  not  of  wisdom,  but  of  short-sightedness. 

Even  as  a  method  of  tax  reform,  the  scheme  is,  as  we 
have  seen,  a  mistaken  one.  Our  system  of  taxation  is  far 
from  being  ideal,  or  even  comparatively  just ;  for  we  are 
still  clinging,  in  a  great  degree,  to  mediaeval  errors.  But 
whatever  be  the  much-needed  reform,  it  is  safe  to  say  that 
neither  the  common  people  nor  the  student  will  ever  accept 
a  scheme  which  is  palpably  unjust,  which  abandons  the  whole 
ideal  theory  of  modern  taxation — that  of  relative  ability  or 
faculty  —  and  which  seeks  to  put  the  burdens  of  the  many 
on  the  shoulders  of  the  few. 


CHAPTER  IV. 

DOUBLE  TAXATION. 

DOUBLE  taxation  in  the  simplest  sense  denotes  the  taxa- 
tion of  the  same  person  or  the  same  thing  twice  over.1  This 
is  at  once  a  very  old  and  a  very  new  phenomenon.  It  is 
very  old  so  far  as  it  is  founded  on  mere  extortion,  on  the 
caprice  of  government  and  on  the  desire  to  raise  revenues 
without  any  regard  to  the  relative  burden  on  the  taxpayer. 
All  government  was  at  first  based  on  might.  Although  this 
was  the  original  cause  of  the  double  taxation  of  one  man 
and  the  exemption  of  his  neighbor,  it  is  in  modern  times 
entirely  overshadowed  by  the  second  cause,  which  is  essen- 
tially of  recent  growth.  We  live  in  an  age  of  industrial 
complexity  and  differentiation.  In  former  times  property 
rights  were  simple,  and  the  little  capital  that  existed  was 
largely  owned  by  the  producer.  To-day  not  only  does  the 
same  capitalist  invest  in  different  enterprises,  not  only  is 
the  producer  often  dependent  for  a  part  of  his  capital  on 
sums  that  belong  to  others,  but  the  old  geographical  unity 
has  been  dissolved,  and  there  is  no  necessary  connection 
between  the  residence  of  the  capitalist  and  the  place  where 
his  capital  is  employed.  A  system  of  taxation,  therefore, 
which  may  have  been  perfectly  just  under  the  older  and 
simpler  conditions,  may  now  be  entirely  inadequate  because 
of  the  failure  of  government  to  take  account  of  these  new 

1  For  a  careful  treatment  of  this  entire  subject  as  applied  to  American  tax 
problems,  the  reader  can  now  be  referred  to  the  recent  doctor's  dissertation 
by  a  former  student,  Francis  Walker,  Double  Taxation  in  the  United  States, 
published  in  the  Columbia  University  Studies  in  History,  Economics  and 
Public  Law,  vol.  v.,  no.  1  (1895). 

95 


96  ESSAYS  IN"  TAXATION 

complications  in  property  rights.  As  a  matter  of  fact,  almost 
all  existing  double  taxation  in  civilized  nations  is  due  to 
inattention  to  these  modern  industrial  intricacies. 

If  we  approach  the  subject  of  double  taxation  more  closely, 
we  are  confronted  by  serious  difficulties.  There  are  almost 
as  many  kinds  of  duplicate  taxation  as  there  are  kinds  of 
taxes  or  of  industrial  relations.  We  find  the  term  used  with 
the  utmost  looseness,  so  that  what  may  be  in  one  state  a 
very  important  species  of  double  taxation  may  be  quite 
insignificant  in  another.  In  the  first  state,  then,  the  phrase 
"  double  taxation  "  always  calls  up  a  particular  set  of  prob- 
lems; while  in  the  other  state  the  same  phrase  will  denote 
something  entirely  different.  Let  us  therefore  endeavor  to 
give  an  analysis  of  the  phenomena  which,  while  not  entering 
into  the  details  of  the  problem,  will  explain  the  principle  in 
all  states. 

There  are  two  distinct  categories  of  double  taxation  — 
that  by  competing  jurisdictions  or  authorities,  and  that  by 
the  same  jurisdiction  or  authority.  The  first  is  essentially 
geographical  in  character.  It  is  partly  due  to  the  fact  that 
modern  wealth  is  more  or  less  cosmopolitan.  A  man  living 
in  one  state  and  owning  property  in  another  may  be  taxed 
on  the  same  property  by  both  states,  because  they  compete 
with  each  other  in  claiming  jurisdiction  over  that  property. 
Not  only  is  this  true  as  between  foreign  countries,  but  it  is 
equally  true,  and  in  fact  of  far  greater  importance,  as  between 
conflicting  authorities  in  the  same  country.  The  separate 
commonwealths  in  a  federal  state,  the  separate  counties  in  a 
commonwealth,  the  separate  towns  in  a  county  —  each  and 
all  of  them  may  make  conflicting  claims  on  the  same  individ- 
ual or  on  the  same  piece  of  property.  Double  taxation  — 
or  it  may  be  triple  or  quadruple  taxation  —  by  competing 
jurisdictions  is  thus  a  product  of  the  modern  mobility  of 
capital  and  labor ;  and  with  the  growing  importance  of  local 
taxation,  the  difficulties  are  multiplied. 

It  may  happen,  however,  that  a  single  authority  —  the 
same  town,  county,  commonwealth  or  nation  —  is  confronted 


DOUBLE  TAXATION-  97 

by  essentially  similar  difficulties  as  to  property  or  persons 
within  its  jurisdiction.  Thus  a  man  buys  a  piece  of  land, 
and  borrows  part  of  the  purchase  price  from  another  man 
living  in  the  same  town.  If  the  town  taxes  the  value  of  the 
land,  which  in  this  case  includes  the  value  of  the  mortgage, 
and  then  taxes  the  mortgage,  the  question  of  double  taxation 
immediately  presents  itself.  So,  again,  if  a  man  invests  his 
property  in  the  stock  of  a  corporation  doing  business  in  the 
same  place  while  the  state  taxes  both  the  investor  and  the 
corporation,  we  are  confronted  by  the  same  difficulty.  In 
such  cases  the  taxes  are  imposed  by  the  same  authority  or 
jurisdiction.  Let  us  discuss  each  class  in  turn. 

I.    Double   Taxation  by  the  Same  Authority. 

The  simplest  case  arises  when  a  person  is  taxed  on  his 
property,  income  or  profits,  while  an  additional  tax  is  im- 
posed on  the  property,  income  or  profits  of  the  business 
in  which  he  is  a  partner.  This  is  such  a  flagrant  case  of 
double  taxation  that  it  is  not  practised  by  any  civilized 
government.  For,  clearly,  the  business  income  is  to  that 
extent  the  individual  income.  This  case  may  therefore  be 
neglected  as  of  no  practical  moment. 

The  first  important  instance  of  double  taxation  arises  when  \ 
an  attempt  is  made  to  tax  property  and  also  to  tax  income  ; 
or  to  tax  either  property  or  income,  and  also  to  levy  a  busi- 
ness or  license  tax.  On  this  point  there  is  much  misconcep- 
tion ;  many  consider  this  to  be  wrong,  because  it  is  double 
taxation.  As  a  matter  of  fact,  however,  if  all  are  put  upon 
the  same  plane,  the  simultaneous  taxation  of  property  and  of 
income  works  no  injustice.  If  all  the  members  of  the  class 
are  treated  alike,  it  makes  no  difference  whether  there  is  one 
single  high  tax  on  property,  or  a  low  tax  on  property  and 
another  low  tax  on  the  profits  of  the  property.  In  fact,  the 
government  would  be  perfectly  justified  in  taxing  the  prop- 
erty, the  income  of  the  property  and  also  the  expenses  or 
any  other  attribute  of  the  property.  All  such  duplicate  or 


98  ESSAYS  IN  TAXATION 

triplicate  taxes  are  perfectly  reasonable  so  long  as  they  fall 
equally  on  all.  Taken  together,  they  amount  simply  to  a 
high  rate  for  a  single  tax  on  the  property.  Double  taxation, 
therefore,  is  not  always  wrong ;  it  is  unjust  only  when  one 
taxpayer  is  assessed  twice  while  another  in  substantially 
the  same  class  is  assessed  but  once.  It  is  the  inequality  of 
taxation  that  instinctively  shocks  us.  But  if  all  persons 
within  the  class  are  equally  subjected  to  the  burden,  there 
can  be  no  just  complaint. 

It  may  be  objected  that  people  are  not  treated  alike  when 
they  pay  different  taxes  on  the  same  income.  Our  opinion 
must  depend,  however,  entirely  on  the  attitude  we  take 
toward  what  is  called  "differentiation"  of  taxation.  If  we 
maintain  that  all  incomes  should  be  taxed  alike,  irrespective 
of  source,  the  objection  would  be  valid.  But  modern  theory 
has  formulated  the  demand  for  a  distinction  between  earned 
and  unearned  incomes,  or  between  incomes  from  labor  and 
incomes  from  property.  Even  so  conservative  a  writer  as 
John  Stuart  Mill  was  an  adherent  to  this  principle,  which  is 
at  present  quite  generally  admitted.  This  "  differentiation  " 
may  be  secured  in  two  ways.  A  lower  rate  may  be  levied 
on  labor  incomes  than  on  property  incomes,  as  in  the  present 
North  Carolina  income  tax,  as  in  the  former  Virginia  income 
tax,  and  as  in  Italy,  in  Holland  and  in  some  of  the  Australian 
colonies.  But  instead  of  making  a  difference  in  the  rates, 
the  same  result  may  be  reached  by  levying  a  uniform  tax  on 
all  incomes  and  an  additional  tax  on  property,  so  that  the 
income  from  property  thus  indirectly  pays  a  higher  rate. 
This  is  the  case  in  Prussia  and  in  some  of  the  Swiss  cantons, 
where  the  property  tax  and  the  income  tax  are  levied  on 
the  same  property.  In  other  words,  property  income  is 
put  into  a  different  class  from  labor  income.  It  is  taxed 
twice  —  once  on  property  and  once  on  income  —  because 
the  seeming  inequality  is  considered  to  be  really  a  higher 
equality.  It  is  double  taxation,  but  it  is  not  unjust  double 
taxation. 

In  some  places  the  principle  of  differentiation  has  not  yet 


DOUBLE  TAXATION-  99 

been  adopted.  When  the  income  tax  is  added  to  the  prop- 
erty tax,  the  income  from  property  already  taxed  is  exempted, 
as  in  Massachusetts  and  in  some  of  the  Swiss  cantons.  Many 
difficulties  have,  however,  arisen  in  the  endeavor  to  distin- 
guish these  property  incomes.  Thus  in  Massachusetts  the 
question  presented  itself  whether  the  income  from  a  business 
could  be  taxed,  if  the  property  invested  in  the  business  was 
already  taxed.  In  a  leading  case  this  practice  was  upheld 
on  the  ground  that  business  profits  are  the  result  not  only  of 
the  capital  invested,  but  of  the  industry  and  skill  of  the 
capitalist.1  Although  this  is  no  doubt  true,  as  a  matter 
of  fact  the  interpretation  of  the  Massachusetts  law  is  unjust 
because  incomes  derived  solely  from  land  or  from  other  in- 
vestments pay  only  once,  while  incomes  derived  from  busi- 
ness enterprise  pay  twice,  once  on  the  property  invested  and 
again  on  the  income  derived.  It  is  this  inequality  of  the  tax 
which  renders  the  system  crude  and  inequitable.  This  has 
been  recognized  in  practice,  and  the  custom  has  arisen  for 
the  assessor  to  allow  six  per  cent  on  the  capital  invested  in 
the  business  as  representing  the  income  from  capital,  and 
to  levy  the  income  tax  only  on  the  surplus  profits.  In  the 
Swiss  cantons  similar  provision  is  made  by  law  and  applies 
to  incomes  from  all  property,  the  amount  exempted  being 
four  to  five  per  cent  of  the  capital.  These  figures  are, 
indeed,  entirely  arbitrary,  although  they  represent  an  inter- 
esting attempt  to  avoid  double  taxation.2 

If,  however,  we  accept  the  principle  of  differentiation,  this 
attempt  is  to  a  certain  extent  unnecessary.  The  higher 
taxation  of  income  from  property  as  compared  with  income 
from  other  sources  is  theoretically  defensible,  although  the 
exact  amount  of  increase  cannot  be  fixed  a  priori.  It  is 
only  when  the  additional  rate  exceeds  this  amount  that  we 

1  Willcox  vs.  Middlesex,  103  Mass.  544.     Cf.  the  interesting  discussion  in 
J.  A.  Lane,  Address  on  Taxation  with  Special  Eeference  to  Taxation  upon 
Income  derived  from  Property  subject  to  Taxation,  Boston  Executive  Busi- 
ness Association,  1891.     Cf.  also  Report  of  the  Special  Commission  on  Taxa- 
tion, Boston,  1891. 

2  For  some  additional  considerations,  see  infra,  chap,  viii.,  sec.  ii. 


100  ESS AyS  IN  TAXATION 

can  really  speak  of  unjust  double  taxation.  Up  to  that  point 
it  may  indeed  be  double  taxation,  but  it  is  not  necessarily  un- 
just taxation.  We  may,  then,  conclude  that  to  tax  property 
and  also  the  income  from  property  is  not  of  itself  inequi- 
table, provided  that  the  income  from  all  property  is  taxed. 
To  single  out  a  special  class,  as  is  done  in  Massachusetts, 
does  indeed  involve  injustice.  But  if  the  tax  applies  to  all 
property,  the  simultaneous  taxation  of  property  and  income 
is  not  of  itself  reprehensible  double  taxation.  Incomes  from 
property  should  be  taxed  higher  than  incomes  from  labor. 

The  second  important  case  of  double  taxation  is  connected 
with  the  question  of  indebtedness.  Shall  debts  be  deducted 
from  assessments  for  the  property  tax,  or  the  interest  on 
indebtedness  from  assessments  for  the  income  tax?1  Is  it 
double  taxation  to  tax  the  creditor  on  the  debt,  and  the 
debtor  on  the  whole  property  including  the  debt  ? 

Put  in  this  way  the  answer  is  plain.  A  man  must  be 
taxed  upon  what  he  has,  not  upon  what  he  has  not.  What 
he  owes  to  another  is  not  really  a  part  of  his  property. 
The  one  great  reason  why  the  countries  of  continental 
Europe  are  changing  their  system  from  taxation  of  product 
to  taxation  of  income,  is  that  under  the  former  method, 
which  disregards  the  personal  position  of  the  individual, 
no  deduction  is  made  for  indebtedness  ;  whereas  by  the 
income  tax  such  deduction  is  made,  for  net  income  can 
mean  only  the  surplus  above  all  necessary  outlays  —  includ- 
ing interest  on  debts  —  connected  with  the  acquisition  of 
the  revenue.  Every  income  tax,  whether  in  Europe  or  in 
America,  therefore  permits  interest  on  indebtedness  to  be 
deducted. 

What  is  true  of  the  income  tax  is  equally  true,  in  theory, 
of  the  property  tax.  But  the  practical  limitations  to  the 
application  of  the  theory  in  the  case  of  the  latter,  and  more 
especially  in  the  tax  on  personalty,  are  very  considerable. 

1  The  fullest  study  of  this  case  is  Heckel,  Die  Einkommensteuer  und  die 
Schuldzinsen,  1890. 


DOUBLE   TAXATION-  101 

The  unfortunate  experience  of  the  United  States  has  already 
been  discussed.1 

There  is,  however,  one  special  phase  of  the  question 
which  is  of  widespread  interest.  In  the  case  of  a  tax  on 
land  or  on  real  estate,  what  should  be  done  with  the  amount 
of  the  mortgage  ?  The  problem  of  double  taxation  arises, 
as  in  several  of  the  American  states,  when  the  borrower 
or  mortgagor  is  assessed  on  the  full  value  of  his  land,  and 
the  lender  or  mortgagee  is  also  taxed  on  the  amount  of 
the  mortgage  debt.  If  A,  the  owner  of  a  $100,000  farm, 
borrows  $50,000  from  B,  the  state  thus  taxes  $150,000,  when 
there  is  really  only  $100,000  of  property ;  and  so  far  as  B  is 
able  to  shift  his  tax  on  A,  the  latter  pays  the  taxes  for  both. 
On  the  other  hand,  if  the  mortgagor  is  allowed  to  deduct 
the  value  of  the  mortgage,  and  if  the  mortgage  debt  is  not 
taxed  at  all  to  the  mortgagee,  the  state  loses  a  legitimate 
revenue.  It  now  taxes  A  on  $50,000  and  does  not  tax  B 
at  all,  thus  getting  a  revenue  from  $50,000,  when  there  is 
really  $100,000  of  property.  In  the  one  case  we  have 
double ;  in  the  other,  we  have  inadequate  taxation. 

What  is  the  remedy?  Two  plans  have  been  tried. 
According  to  the  first  the  mortgagor  is  taxed  on  the  full 
amount  of  the  property,  but  the  mortgagee  is  exempt.  This 
method  is  based  on  the  theory  that  as  a  result  of  the  exemp- 
tion of  mortgages  capitalists  will  lend  more  readily  and  at 
a  lower  rate,  and  that  the  benefits  of  exemption  will  then 
be  diffused  throughout  the  community.  This  plan  certainly 
is  a  great  improvement  upon  the  double  taxation  usually 
practised;  but  it  might  be  claimed  that  a  still  more  satis- 
factory adjustment  of  the  difficulty  can  be  brought  about. 
As  has  been  elsewhere  pointed  out,  in  actual  life  the  com- 
plete shifting  of  the  tax  from  the  mortgagee  to  the  mortgagor 
may  be  prevented  by  economic  friction.2  If  B,  the  lender, 
is  taxed  on  the  mortgage,  he  will  indeed  try  to  shift  the  tax 
to  the  borrower ;  but  he  may  not  always  wholly  succeed.  So 

1  Supra,  pp.  34  et  seq. 

2  See  The  Shifting  and  Incidence  of  Taxation  (2d  ed.),  pp.  266-268. 


102  ESSAYS  IN  TAXATION 

far  as  he  does  succeed,  it  is  good  policy  to  exempt  the  mort- 
gage, because  the  owner  of  the  mortgaged  estate  can  then 
get  his  loan  more  cheaply ;  but  so  far  as  he  does  not  succeed, 
it  is  unwise  to  exempt  the  mortgage.  The  theory  of  the 
property  tax  cannot  permit  a  man  whose  wealth  consists  in 
mortgages  to  go  scot-free,  for  his  ability  remains  the  same 
whether  his  property  consists  in  mortgages  or  in  other 
income-bearing  investments.  To  the  extent  that  the  lender 
cannot  shift  the  tax,  the  exemption  of  mortgages  becomes, 
therefore,  illogical  and  unjust,  because  the  interest  rate  will 
not  fall  by  the  amount  of  the  tax,  and  the  lender  will  receive 
more  benefit  than  the  borrower.  Thus  while  the  exemption 
of  mortgages  is  an  advance,  under  certain  conditions  it  would 
not  be  a  complete  solution  of  the  difficulty. 

Under  such  conditions,  theory  would  demand  the  exemp- 
tion of  the  mortgage  debt,  i.e.  of  the  mortgagor  on  his 
mortgaged  estate.  His  ability  is  really  reduced  by  the 
amount  of  the  mortgage,  for  the  profits  of  his  land  go  to 
pay  the  interest  on  his  debt.  To  tax  thus  both  lender  and 
borrower  is  double  taxation.  The  remedy,  however,  might 
be  declared  to  consist  in  exempting  not  the  lender,  but  the 
borrower ;  not  the  credit  of  the  mortgagee,  but  the  liability 
of  the  mortgagor.  Tax  the  lender  on  the  amount  of  the 
mortgage  and  the  borrower  on  the  value  of  the  property 
minus  the  mortgage. 

In  order,  however,  to  avoid  the  practical  difficulties  often 
engendered  by  the  exemption  of  mortgage  debts,  it  is  interest- 
ing to  observe  the  modifications  adopted  by  several  common- 
wealths, like  California  and  Massachusetts,  and  also  recently 
introduced  in  New  Zealand.1  In  these  states  the  mortgagor 
can  offset  the  amount  of  the  mortgage  debt.  The  mortgage, 
on  the  other  hand,  is  taxable  in  the  hands  of  the  mortgagee, 
but  it  is  treated  as  realty,  not  as  personalty  —  that  is,  its  situs 
does  not  follow  the  domicile  of  the  mortgagee,  but  it  is  taxed 
in  the  locality  where  the  mortgaged  property  lies.  If  the  tax 
is  paid  by  the  mortgagor,  he  may  recoup  it  from  the  mort- 
1  See  infra,  chap,  x.,  sec.  ii. 


DOUBLE  TAXATION  103 

gagee.  In  Massachusetts,  indeed,  this  provision  is  practi- 
cally void,  because  nearly  all  mortgages  contain  a  clause 
requiring  the  mortgagor  to  pay  taxes  upon  the  mortgaged 
estate,  and  a  further  agreement  to  pay  all  taxes  upon  the 
debt  in  the  event  of  the  repeal  of  the  law.  The  practical 
result,  therefore,  is  virtually  the  same  as  if  mortgages  were 
exempt,  and  the  borrower  taxed  on  the  total  value  of  his 
land.1  In  California  all  such  agreements  between  mortgagor 
and  mortgagee  are  void.  Legal  enactments,  however,  can- 
not prevent  the  operation  of  economic  laws.  As  a  matter  of 
fact,  the  interest  rate  on  mortgages  rose  as  a  consequence 
of  the  law,  and  it  has  even  been  claimed  with  some  degree 
of  truth  that  interest  has  risen  by  a  slight  amount  over  and 
above  the  tax,  to  compensate  the  lender  for  trouble  and 
risk.2  It  would  seem  then  that  after  all  there  is  not  much 
to  choose  between  the  two  methods  —  that  of  complete 
exemption  of  mortgages  on  the  one  hand,  and  on  the  other 
that  of  taxing  the  mortgage  as  realty,  but  deducting  it  from 
the  value  of  the  land.  All  things  considered,  therefore,  it 
may  be  just  as  wise  to  adopt  the  simple  expedient  of  exemp- 
tion of  mortgages,  as  the  more  complicated  method  pur- 
sued in  Massachusetts  and  California.  But  either  plan  is 
vastly  preferable  to  the  system  which  taxes  the  mortgagee 
on  the  mortgage,  and  the  mortgagor  on  the  full  value  of 
the  land. 

In  the  above  discussion  we  have  treated  primarily  of 
individual  indebtedness.  The  same  question  often  arises  in 
connection  with  corporate  debts,  especially  in  the  shape  of 

1  See  the  Report  of  the  Special  Committee  of  the  Boston  Executive  Business 
Association  on  Taxation,  1889,  p.  31.    For  an  investigation  of  the  question  as 
to  how  far  the  rate  of  interest  has  been  affected,  see  Thomas  Hills,  Address 
on  Taxation,  delivered  before  the  Boston  Executive  Business  Association, 
1890,  p.  20;  and  Nathan  Matthews,  Jr.,  "Double  Taxation  of  Mortgaged 
Real  Estate,"  in  Quarterly  Journal  of  Economics,  iv.,  p.  339.    The  latest 
discussion  of  the  whole  question  is  found  in  R.  H.  Dana,  Double  Taxation 
in  Massachusetts.     Published  under  the  auspices  of  the  Massachusetts  Anti- 
Double-Taxation  League,  1895,.  pp.  72-86. 

2  See  C.  C.  Plehn,  "The  Taxation  of  Mortgages  in  California,"  in  The 
Tale  Review,  viii.,  pp.  31-67. 


104  ESSAYS  IN  TAXATION 

mortgage  bonds.  It  has  usually  been  overlooked  that  there 
is  a  decided  distinction  between  individual  and  corporate 
property  or  income.  In  the  case  of  individuals,  to  tax  both 
the  property  and  the  amount  of  the  mortgage  debt  is  theo- 
retically unsound,  because  the  individual's  true  taxable  prop- 
erty consists  in  his  surplus  above  indebtedness.  The  capital 
stock  of  a  corporation,  however,  represents,  in  many  cases, 
only  a  portion  of  the  property,  while  the  remainder  is  repre- 
sented by  the  bonded  indebtedness.  In  the  United  States, 
for  example,  it  is  well  known  that  railroads  are  built  mainly 
on  the  proceeds  of  mortgage  bonds.  To  exempt  the  mort- 
gage debt  in  the  case  of  these  corporations  would  thus  be 
inequitable  ;  for  only  by  taxing  both  capital  stock  and 
mortgage  debt  can  the  state  reach  the  true  faculty  of  the 
corporation.  In  the  case  of  individuals,  indebtedness  dimin- 
ishes the  capacity  to  pay  taxes ;  in  the  case  of  corporations, 
indebtedness  often  augments  that  capacity  because  it  is 
incurred  for  the  purpose  of  increasing  the  value  of  the  prop- 
erty, or  rather  because  it  is  not  so  much  a  real  debt  as  a 
constituent  part  of  the  property.1  It  is  the  correct  recog- 
nition of  this  fact  that  has  led  to  the  introduction  of  the  tax 
on  corporate  loans  in  many  states,  American  and  foreign. 

We  come  now  to  the  third  case  of  double  taxation,  which 
in  the  modern  days  of  corporate  industry  has  assumed  much 
importance, — that  of  the  double  taxation  of  a  corporation 
and  of  the  investor  in  corporate  securities.  If  we  tax  the 
corporation,  shall  we  also  tax  the  individual  stockholder 
or  bondholder? 

The  great  divergence  of  practice  in  America,  as  well  as 
abroad,  will  be  discussed  in  another  chapter ; 2  but  the 
economic  theory  is  simple.  If  the  tax  —  whether  on  income 
or  on  property  —  is  general,  and  applies  to  all  classes  of  cor- 

1  The  great  defect  in  the  otherwise  admirable  study  of  Heckel,  mentioned 
above,  is  the  failure  to  distinguish  between  corporations  and  natural  per- 
sons.    He  is  indeed  forced  to  the  practical  conclusion  that  corporations  must 
be  liable  for  the  tax  on  mortgage  debts,  but  his  arguments  are  weak  and 
inconclusive  ;  c/.  p.  182  of  his  work. 

2  Infra,  chap,  viii.,  sec.  v. 


DOUBLE  TAXATION  105 

porations  and  to  other  non-corporate  investments  as  well, 
it  is  manifestly  double  taxation  to  assess  the  security  holder 
as  well  as  the  corporation.  The  tax  on  the  corporation 
diminishes  his  income  from  the  corporate  security ;  an  addi- 
tional tax  on  the  security  would  involve  double  taxation  of 
the  same  income  or  property.  But  if  the  tax  is  a  special  or 
exclusive  tax  instead  of  being  a  general  tax,  the  matter  is 
different.  In  that  case  the  general  doctrine  of  capitalization 
of  taxation  will  apply.1  If  only  one  class  of  corporations 
is  taxed,  the  purchaser  of  these  corporate  securities  will 
escape  taxation,  because  the  amount  of  the  tax  is  discounted 
in  the  depreciation  of  the  security.  For,  let  us  suppose  that 
a  corporation  previously  untaxed  has  been  paying  five  per 
cent  dividends  on  its  stock  quoted  at  par.  If  a  special  tax 
of  ten  per  cent  be  imposed  on  these  dividends,  the  stock- 
holders will  get  only  four  and  a  half  per  cent.  But  since 
by  the  supposition  other  classes  of  corporations,  or  at  all 
events  other  non-corporate  investments,  are  not  taxed,  the 
price  of  the  stock  will  fall  to  ninety.  People  who  can  get 
five  per  cent  on  their  capital  will  not  ordinarily  consent  to 
take  four  and  a  half  per  cent.  The  original  holders  of  the 
stock  will  indeed  lose,  but  the  new  purchasers  will  not  be 
affected,  because  the  tax  is  capitalized  and  leads  to  a  deprecia- 
tion of  the  capital  value  of  the  stock.  A  dividend  of  four 
and  a  half  dollars  on  stock  costing  ninety  is  as  good  as  one 
of  five  dollars  on  stock  costing  a  hundred.  A  tax  levied 
only  on  corporate  profits,  or  'only  on  some  special  classes  of 
corporations,  does  not  affect  any  one  except  those  who  become 
stockholders  before  the  imposition  of  the  tax.  To  tax  the 
new  purchaser  on  his  security  would  not  in  such  a  case 
involve  unjust  double  taxation. 

There  is  one  other  condition  under  which  the  simulta- 
neous taxation  of  the  corporation  and  the  security  holder  is 
not  unjust.  In  the  case  of  a  stockholder  we  have  seen  that 
if  the  tax  is  general,  it  is  unjust  to  tax  both  the  corporation 
and  the  stockholder.  In  the  case  of  a  bondholder  this 

1  See  The  Shifting  and  Incidence  of  Taxation  (2d  ed.),  pp.  181-186. 


106  ESSAYS  IN  TAXATION 

would  also  ordinarily  be  true,  when  the  income  tax  on  the 
corporation  is,  for  instance,  deducted  from  the  interest  of  the 
bondholder  as  well  as  from  the  dividends  of  the  stockholder. 
In  some  cases,  however,  it  happens  that  the  corporation 
is  willing  to  assume  the  tax  as  a  whole,  and  to  count  the 
tax  among  its  fixed  charges,  declaring  the  coupons  free  from 
tax.  In  such  a  case  it  is  really  the  stockholders  who  pay ; 
for  the  interest  on  the  bonds  is  fixed,  and  what  is  not 
deducted  from  the  interest  must  be  paid  out  of  the  surplus 
earnings  which  would  otherwise  ultimately  go  to  the  stock- 
holders. The  bondholders  are  not  reached  at  all  by  such 
a  tax,  except  in  the  very  indirect  way  that  they  may  be 
exposed  to  an  ultimate  diminution  in  the  security  of  their 
lien.  But  the  tax  as  such  does  not  strike  them  at  all; 
their  property  or  income  in  the  corporate  bonds  goes  scot- 
free.  An  additional  tax  upon  the  bondholder  would  thus 
really  not  involve  any  injustice  to  them.  Here,  as  well  as 
in  the  preceding  case,  a  study  of  the  real  incidence  of  the 
tax  becomes  important.  What  is  apparently  double  taxa- 
tion may  turn  out  not  to  be  such. 

We  may,  therefore,  sum  up  by  saying  that  in  so  far  as 
the  tax  is  general,  it  is  manifestly  unjust  to  tax  both  cor- 
poration and  security  holder,  but  that  when  the  tax  is  partial 
or  when  the  corporation  assumes  the  tax  as  a  whole,  the 
additional  taxation  of  stockholder  or  of  bondholder  is  not 
necessarily  either  double  taxation  or  inequitable  taxation. 

There  remains  the  fourth  and  final  form  of  double  taxa- 
tion by  the  same  jurisdiction,  which  has  given  rise  to  con- 
siderable difficulty.  This  applies  especially  to  corporations. 
The  question  is  :  Is  it  permissible  to  tax  the  corporation 
on  its  property  and  again  on  its  capital  stock  ? 

The  answer  from  the  economic  standpoint  is  simple.  The 
exact  relations  between  capital  stock  and  property  are  dis- 
cussed more  fully  below.1  But  for  the  purposes  of  this 
argument  it  is  clear  that  corporate  property  is  at  all  events 
one  of  the  elements  that  contribute  to  the  value  of  the  capital 
1  Infra,  chap,  viii.,  sec.  iii. 


DOUBLE  TAXATION-  107 

stock.  If  this  be  true,  to  tax  the  corporation  on  its  property, 
and  then  to  levy  an  additional  tax  on  its  stock,  is  pro  tanto 
duplicate  taxation  of  an  unjust  character.  If  other  persons 
are  taxed  only  once  on  property,  corporations  should  not 
be  taxed  again  on  what  is  'at  all  events  a  part  of  their 
property. 

This  concludes  the  discussion  of  the  important  cases 
of  double  taxation  arising  from  the  actions  of  the  same  tax 
jurisdiction.  Equally  important  are  the  cases  due  to  the 
conflicts  of  jurisdiction  between  independent  taxing  authori- 
ties. These  we  now  proceed  to  take  up. 

II.    Double  Taxation  by   Competing  Authorities. 

The  problems  included  under  this  head  are  essentially  of 
modern  growth.  Until  very  recently  they  have  received 
little  attention,  for  three  reasons.  In  the  first  place,  the  inter- 
national relations  of  commerce  and  industry  were  compara- 
tively unimportant;  and  even  within  the  same  state,  business 
methods  and  business  investments  were  far  more  localized  and 
less  complicated.  Secondly,  the  stranger  in  primitive  society 
was  originally  an  enemy.  The  survival  of  this  idea  in  the 
conception  that  the  foreigner,  as  such,  is  an  especially 
desirable  subject  of  taxation  has  only  slowly  given  way  to 
the  broader  conceptions  of  the  modern  age.  Thirdly  and 
chiefly,  in  former  times  but  little  attention  was  given  to  the 
question  of  justice  in  taxation.  Even  when  the  general 
problem  was  considered,  the  details  of  double  taxation  were 
regarded  as  insignificant.  But  nowadays  the  question  is 
forging  to  the  front. 

It  need  not  be  pointed  out  that  amid  the  complexities  of 
modern  industrial  life  equality  of  taxation  cannot  be  attained 
without  a  careful  consideration  of  these  problems.  To-day  .  / 
a  man  may  live  in  one  state,  may  own  property  in  a  second 
and  may  carry  on  business  in  a  third.  He  may  die  in  one 
place  and  leave  all  his  property  in  another.  He  may  spend 
all  his  income  in  one  town  and  may  derive  that  income 


108  ESSAYS  IN  TAXATION 

from  property  or  business  in  another  town.  He  may 
carry  on  business  in  several  states,  or  if  he  has  invested  in 
corporate  securities,  the  corporation  may  be  the  creature  of 
another  state  and  may  be  situated  or  do  business  in  a  third. 
All  these  cases  may  affect  foreign  states  or  separate  com- 
monwealths of  the  same  federal  state,  or  separate  cities 
or  counties  of  the  same  commonwealth.  The  possible  entan- 
glements are  well-nigh  innumerable.1 

The  question  thus  arises :  Where  shall  a  man  be  taxed  ? 
Whatever  principle  we  lay  down,  it  is  plain  that,  if  every 
state  or  every  tax  authority  followed  the  same  principle,  it 
would  be  easy  to  avoid  double  taxation.  The  complications 
arise  from  the  fact  that  one  state  follows  one  principle,  and 
that  another  state  follows  an  opposite  or  conflicting  principle. 
Let  us  discuss  the  different  principles  that  have  actually  been 
employed. 

The  oldest  principle  is  that  of  citizenship  or  political  alle- 
giance. Originally  only  the  citizen  of  the  state  or  the  burgess 
of  the  town  had  any  obligation  to  the  government  under 
which  he  lived.  But  it  soon  happened  that  commercial  rela- 
tions developed,  until  in  modern  times  the  actual  population 
of  any  state  or  community  is  by  no  means  limited  to  citizens. 
To  tax  only  the  citizen  and  to  exempt  the  stranger,  whether 
the  stranger  be  from  another  state  or  only  from  another  city, 
would  plainly  be  inadmissible.  Political  allegiance  in  this 
sense  is  nowhere  to-day  made  the  basis  of  taxation.  Yet  when 
political  allegiance  involves  a  positive  rather  than  a  negative 
attitude,  it  is  still  followed,  at  all  events  in  international  rela- 
tions. While  the  stranger  is  not  exempted,  the  citizen  living 

1  The  question  has  naturally  attracted  more  attention  in  federal  states. 
We  find  almost  no  discussion  of  the  problems  in  French  or  English  books  on 
finance.  It  is  only  lately  that  the  matter  has  been  seriously  discussed  in  the 
federal  states  of  Germany  and  Switzerland.  See  especially  Schanz,  "  Die  Ort 
der  Besteuerung,"  in  Finanzarchiv,  vol.  ix.  (1892).  This  was  written  two 
years  after  my  discussion  of  the  practical  problems  in  the  essay  on  the  Taxa- 
tion of  Corporations,  reproduced  in  this  volume.  It  is  gratifying  to  observe 
that  our  conclusions  are  almost  everywhere  in  accord.  For  the  discussion  of 
the  principles,  Schanz's  essay  is  very  helpful. 


DOUBLE  TAXATfOW  109 

abroad  is  frequently  held  responsible  to  his  country.  Political 
fealty  cannot  be  so  easily  abandoned;  political  rights  involve 
political  duties.  Among  them  is  certainly  the  duty  to  pay 
tuxes. 

In  modern  times,  however,  the  force  of  political  allegiance 
has  been  considerably  weakened.  The  political  ties  of  a  non- 
resident to  the  mother  country  may  often  be  merely  nominal. 
His  life  may  be  spent  abroad  and  his  real  interests  may  be 
indissolubly  bound  up  with  his  new  home,  while  his  loyalty 
to  the  old  country  may  have  almost  completely  disappeared. 
In  many  cases,  indeed,  the  new  home  will  also  become  the 
place  of  a  new  political  allegiance.  But  it  is  well  known 
that  in  some  countries  the  political  bond  cannot  be  dis- 
solved even  by  permanent  emigration ;  while  it  frequently 
happens  that  the  immigrant  has  no  desire  to  ally  himself 
politically  with  what  is  socially  and  commercially  his  real 
home.  In  the  modern  age  of  the  international  migration  of 
persons  as  well  as  of  capital,  political  allegiance  no  longer 
forms  an  adequate  test  of  individual  fiscal  obligation.  It  is 
fast  breaking  down  in  practice,  and  it  is  clearly  insufficient 
in  theory. 

The  second  principle  that  may  be  followed  is  that  of 
mere  temporary  residence  ;  every  one  who  happens  to  be  in 
the  town  or  state  may  be  taxable  there.  This,  however,  is 
also  inadequate.  If  a  traveller  chances  to  spend  a  week  in 
a  town  just  when  the  tax  collector  comes  around,  there  is 
no  good  reason  why  he  should  be  assessed  on  his  whole 
property  by  this  particular  town  ;  the  relations  between  him 
and  the  government  are  too  slight.  Moreover,  as  he  goes 
from  place  to  place,  he  may  be  taxable  in  each  place  or  in 
none.  Temporary  residence  is  plainly  inadmissible  as  a  test. 

The  third  principle  is  that  of  domicile  or  permanent  resi- 
dence. This  is  a  far  more  defensible  basis,  and  it  has  many 
arguments  in  its  favor.  Those  who  are  permanently  resi- 
dent in  a  place  ought  undoubtedly  to  contribute  to  its 
expenses.  But  the  principle  is  not  perfectly  satisfactory. 
For,  in  the  first  place,  a  large  part  of  the  property  in  the 


110  ESSAYS  IN  TAXATION 

town  may  be  owned  by  outsiders :  if  the  government  were 
to  depend  only  on  the  permanent  residents,  it  would  lose  a 
portion  of  its  rightful  dues.  In  the  second  place,  most  of 
the  revenues  of  the  resident  population  may  be  derived  from 
outside  sources,  as  from  business  conducted  in  other  states. 
In  this  case,  the  home  government  would  be  gaining  at  the 
expense  of  its  neighbor.  Thirdly,  property  owners  like  the 
absentee  landlords  of  Ireland  or  the  absentee  stockholders 
of  "the  railways  in  the  western  states  of  America  cannot  be 
declared  devoid  of  all  obligation  to  the  place  whence  their 
profits  are  derived.  Domicile,  therefore,  cannot  be  the  exclu- 
sive consideration. 

The  fourth  principle  is  that  of  the  location  of  the  property. 
This  again  is  undoubtedly  legitimate  to  a  certain  extent. 
For  a  man  who  owns  property  has  always  been  considered  to 
have  such  close  relations  with  the  government  of  the  town 
or  county  where  his  property  is  situated,  as  to  be  under  a 
very  decided  obligation  to  support  it.  But  for  reasons  just 
the  reverse  of  those  mentioned  in  the  preceding  case,  the  loca- 
tion of  the  property  clearly  cannot  be  the  only  test.  Perma- 
nent residents  of  means  owe  some  duty  to  the  place  where 
they  live,  even  if  their  property  is  situated  elsewhere.  A 
New  Yorker  who  has  invested  even  his  whole  property  abroad 
cannot  be  said  to  be  entirely  without  any  duty  to  support 
the  New  York  or  American  government. 

We  see  then  that  each  of  the  last  three  principles  —  tem- 
porary residence,  domicile  and  location  of  property  —  has  a 
certain,  but  none  a  complete  justification.  There  is,  however, 
one  final  principle,  toward  which  all  modern  governments  are 
tending,  which  reconciles  the  three  preceding  tests.  This 
is  the  principle  of  economic  interest  or  economic  allegiance, 
as  against  the  antiquated  doctrine  of  political  allegiance. 
Every  man  may  be  taxed  by  competing  authorities  according 
to  his  economic  interests  under  each  authority.  The  ideal 
solution  is  that  the  individual's  whole  faculty  should  be 
taxed ;  but  that  it  should  be  taxed  only  once,  and  that  it 
should  be  divided  among  the  tax  districts  according  to  his 


DOUBLE  TAXATION  111 

relative  interests  in  each.  The  individual  has  certain  economic 
interests  in  the  place  in  which  he  happens  to  live,  in  the 
place  of  his  domicile,  and  in  the  place  or  places  where  his 
property  is  situated  or  from  which  his  income  is  derived.  If 
he  makes  money  in  one  place,  he  spends  it  in  another. 

It  has  been  pointed  out  elsewhere  that  the  conception  of 
faculty  in  taxation  involves  two  considerations,  —  those  con- 
nected with  acquisition  or  production,  and  those  connected 
with  outlay  or  consumption.1  In  apportioning  the  total 
fiscal  obligation  of  the  individual  it  is  therefore  necessary  to 
ascertain  from  what  place  or  places  his  earnings  are  derived, 
and  then  to  observe  in  what  place  or  places  they  are  ex- 
pended. Only  in  this  way  can  his  real  economic  interests 
be  located. 

From  this  point  of  view  the  solution  of  the  problem  would 
be  easy.  Let  the  state  or  states  from  which  earnings  are 
received  divide  among  themselves  the  taxes  on  production, 
that  is,  the  taxes  levied  according  to  property  or  income  or 
business  or  any  other  measure  of  productive  capacity;  let 
the  state  where  the  individual  lives  and  where  the  earn- 
ings are  spent  levy  taxes  on  consumption,  whether  direct  or 
indirect. 

This  plan,  however,  involves  one  serious  difficulty.  Ex- 
penditure, for  obvious  reasons,  is  no  longer  considered  so 
satisfactory  a  basis  of  taxation  as  revenue.  And  although 
taxes  on  consumption  are  still  largely  employed  and  are 
defensible  for  the  central  authorities,  their  use  for  local  or 
commonwealth  purposes  tends  everywhere  to  be  restricted  to 
narrow  limits.  Where  taxes  on  consumption  are  abandoned, 
it  becomes  necessary  to  devise  some  compromise  in  appor- 
tioning the  taxes  on  production.  Some  writers  have  sug- 
gested that  three-quarters  of  the  tax  on  property  or  business 
or  earnings  should  go  to  the  state  of  domicile,  while  others 
have  proposed  an  equal  division.  It  may  be  conceded  that 
the  exact  division  is  necessarily  arbitrary;  but  even  an  arbi- 
trary division  is  better  than  no  division  at  all.  Whatever 

1  See  my  work  on  Progressive  Taxation  in  Theory  and  Practice,  p.  191. 


112  ESSAYS  IN-  TAXATION 

figures  we  adopt,  it  is  none  the  less  clear  that  the  principle 
of  economic  interest  will  help  us  out  of  many  a  difficulty. 

In  international  relations  we  have  scarcely  begun  to  apply 
the  doctrine  ;  in  fact,  we  still  cling  in  part  to  the  prin- 
ciple of  political  allegiance.  The  result  is  much  unjust 
double  taxation.  In  internal  relations,  as  in  the  federal 
states  of  America,  Germany  and  Switzerland,  more  progress 
has  been  made.  In  the  United  States,  as  to  a  large  extent 
everywhere  else,  the  rule  of  situs  has  been  applied  to  real 
estate.  This  is  taxed  where  it  is  situated.  But  in  the  case 
of  personalty  or  business  most  countries  waver  between  the 
doctrines  ef  situs  and  of  domicile.  In  America,  for  example, 
while  most  of  the  states  tax  personal  property  actually  located 
within  their  bounds,1  we  find  in  many  places  the  legal  princi- 
ple, which  had  its  origin  in  entirely  different  reasons,  that 
personalty  follows  the  owner  —  mobilia  personam  sequuntur.2 
Accordingly  if  the  owner  is  a  non-resident,  his  personal 
property  will  be  taxed  twice  —  once  by  the  state  where  it  is 
located,  and  again  by  the  state  of  his  domicile. 

In  the  United  States  a  few  commonwealths  have  indeed 
provided  by  statute  for  the  exemption  of  a  resident's  per- 
sonalty, if  permanently  located  and  taxed  in  another  state. 
Such  is  now  the  law  in  Alabama,  California,  Connecticut, 
Indiana,  Louisiana,  Maine,  Missouri,  New  Jersey,  Ohio, 
Rhode  Island,  South  Carolina,  Vermont  and  West  Virginia.3 
The  same  rule  has  been  extended  by  judicial  interpretation 
to  Illinois,  Kansas,  Missouri,  New  York,  North  Carolina  and 

1  That  this  is  permissible  is  recognized  in  Coe  vs.  Errol,  116  U.  S.  617. 

2  Or,  as  it  is  sometimes  put,  mobilia  inhaerent  ossibus  domini.     Cf.  in 
general,  Story,  Conflict  of  Laws,  §§  362,  383,  550.    The  original  use  made  of 
this  principle  in  America  may  be  seen  in  Catlin  vs.  Hall,  21  Vt.  152. 

8  Ala.  Code,  §  453 ;  Cal.  Code,  §  3638 ;  Conn.  Gen.  Stat.,  sees.  3828-3830 
(applies  to  property  actually  invested  in  merchandizing  or  manufacturing) ; 
Ind.  Rev.  Stat.,  sec.  6287  ;  La.  Act  July  9,  1890,  No.  106,  §  1 ;  Me.  Rev. 
Stat.,  tit.  i.,  sec.  14,  §  10;  Mo.  Rev.  Stat.,  §§  7503,  7508,  7531;  N.  J.  Rev. 
Stat.  [1877],  p.  1151 ;  O.  Rev.  Stat.  (1892),  §  2735;  R.  I.  Pub.  Stat.,  chap. 
42,  sec.  9  (applies  only  to  machinery,  machine  tools,  stock  in  trade,  mer- 
chandise, lumber,  coal  and  stock  in  livery  stables)  ;  S.  C.  Rev.  Stat. ,  chap. 
12,  sec.  1 ;  Vt.  Rev.  Laws,  sec.  270 ;  W.  Va.  Code,  chap.  29,  sec.  48. 


DOUBLE  TAXATION'  113 

Ohio.1  In  other  commonwealths  the  rule  is  applied  only 
in  part.  Thus  in  Arkansas,  South  Carolina  and  Virginia  a 
similar  exemption  is  made  for  all  personalty  except  in  so 
far  as  money,  credits  or  investments  in  business  are  con- 
cerned.2 In  Delaware  only  so  much  of  the  personalty 
is  exempt  as  consists  of  non-productive  securities  of 
other  commonwealths.3  Finally,  in  Michigan  all  the  per- 
sonalty of  a  resident  is  taxable  except  that  which  is  in- 
vested in  another  commonwealth.4  But  in  most  of  the 
commonwealths  the  legal  fiction  still  prevails,  and  the  indi- 
vidual is  taxed  on  all  his  personalty  irrespective  of  its 
location.  The  obvious  result  is  double  taxation  of  a  nature 
which  cannot  possibly  be  justified. 

According  to  the  doctrine  of  economic  interest,  the  solu- 
tion is  plain.  A  large  part  of  the  tax  should  go  to  the  place 
where  the  property  lies  or  whence  the  earnings  are  derived  ; 
a  smaller  share  to  the  domicile  of  the  owner.  But  this  pre- 
supposes uniform  action  on  the  part  of  the  conflicting  authori- 
ties. As  long  as  no  interstate  or  intercommunal  agreements 
are  made,  the  simplest  plan  would  be  for  the  state  of  location 
to  tax  the  tangible  property,  and  the  state  of  residence  to  tax 
the  intangible  property  or  income  therefrom. 

1  Mills  vs.  Thornton,  26  HI.  300  (1861)  ;  Fisher  vs.  Commissioners  of 
Rush  County,  19  Kan.  414  ;  State  vs.  St.  Louis  County,  47  Mo.  594  (1871)  ; 
State  ex  rel.  Dunnica  vs.  County  Court,  69  Mo.  454  (1879)  ;  Valle  vs.  Ziegler, 
84  Mo.  214  (1882)  ;  People  ex  rel  Hoyt  vs.  Commissioners,  23  N.  Y.  224 
(1861),  which  decided  that  shares  of  foreign  corporations  are  exempt  from 
local  taxation  in  New  York  because  they  have  no  situs  in  the  state  ;  People 
ex  rel.  Trowbridge  vs.   Commissioners,  4  Hun.  595  (1875)  ;  2  Jones  Eq. 
Rep.  53,  where  the  principle  mobilia  personam  sequuntur  is  declared  to 
be  "  a  fiction  which  has  no  application  to  questions  of  revenue  "  ;  Carrier  vs. 
Gordon,  21  Ohio  605  (1853).     Cf.  for  the  practice  and  cases  up  to  1871, 
(First)  Report  of  the  (New  York}  Commissioners  to  revise  the  Laws  for  the 
Assessment  and  Collection  of  Taxes  (1871),  pp.  130-147  ;  and  for  a  more 
systematic  discussion  of  the  later  cases,  Walker,  Double  Taxation  in  the 
United  States,  chap.  vi. 

2  Ark.,  Mansfield's  Digest,  sec.  5048 ;  S.  C.  Gen.  Stat.,  chap.  11,  sec.  149; 
Va.  Code,  sec.  492. 

8  Del.  Laws  1879,  chap.  2. 
*  Mich.  Laws  1885,  no.  153,  sec.  2. 
i 


114  ESSAYS  IN  TAXATION 

This  conclusion,  however,  is  complicated  by  several  con- 
siderations. In  the  first  place,  the  intangible  property  may 
consist  of  corporate  securities,  while  the  corporation  may 
already  be  taxed  in  the  state  where  it  is  situated;  secondly, 
the  intangible  property  may  consist  of  a  mortgage  on  real 
estate  abroad,  which  in  that  state  is  treated  as  realty  and 
already  taxed  ;  and  finally,  the  American  experience  with 
the  taxation  of  intangible  personalty  in  general  is  very 
sad.  For  practical  purposes,  therefore,  the  conclusion 
would  be :  Tax  only  realty  and  tangible  personalty,  and 
tax  this  in  the  state  of  location.  When  the  era  of  interstate 
agreements  is  finally  reached,  it  will  be  feasible  to  attempt 
the  more  ideal  plan  of  taxing  the  entire  property  or  income, 
dividing  the  proceeds  among  the  states  of  location  and 
domicile  according  to  a  pre-established  proportion,  and  in 
harmony  with  the  doctrine  of  economic  interest.  In  the 
interval  it  may  be  possible  to  reach  intangible  personalty 
through  some  form  of  national  taxation,  the  general  gov- 
ernment then  to  apportion  the  proceeds  to  the  states.  But 
under  the  recent  income  tax  decision  it  is  doubtful  whether 
this  can  be  done  in  the  United  States  without  an  amendment 
to  the  constitution. 

It  will  be  well  now  to  take  up  in  turn  the  most  important 
cases  of  double  taxation  by  different  jurisdictions.  As  the 
problems  apply  to  interstate  or  inter-municipal  complications 
as  well  as  to  difficulties  between  foreign  countries,  the  word 
alien  must  be  understood  to  include  persons  from  another 
town  or  commonwealth  as  well  as  from  a  foreign  country. 
And  since  the  questions  are  precisely  the  same  when  applied 
to  corporate  business  as  when  applied  to  individuals  or  indi- 
vidual business,  the  term  citizen  must  be  understood  to  mean 
legal  as  well  as  natural  persons.  Let  us  proceed  to  discuss 
the  cases  in  order. 

1.  Shall  a  resident  citizen  be  taxed  on  his  property  abroad 
or  on  his  income  from  abroad  f 

In  international  relations   the  principle  of   political  alle- 


DOUBLE  TAXATION  115 

glance  is  still  largely  followed.  Thus  in  England,  and  many 
other  countries,  as  formerly  and  again  more  recently  in  the 
United  States,  a  resident  citizen  is  subject  to  the  income 
tax  on  his  entire  income,  whether  received  abroad  or  not. 
If,  as  is  usually  the  case,  the  income  is  again  taxed  where  it 
is  earned,  we  have  a  glaring  case  of  double  taxation.  It  is 
only  in  the  inheritance  tax  that  the  principle  of  citizenship 
has  begun  to  be  weakened,  and  that  the  doctrine  of  location 
is  applied  to  a  small  extent. 

In  state  and  local  taxation  the  principle  of  economic  inter- 
est has  made  more  headway.  In  the  United  States,  as  well 
as  in  several  of  the  German  commonwealths  and  Swiss  can- 
tons, the  rule  of  situs  is  generally  applied  to  real  estate  and 
to  tangible  personalty  and  business  ;  the  rule  of  domicile  to 
other  forms  of  property  or  revenue.  In  Germany  the  taxes 
on  business,  salaries  and  pensions,  as  well  as  on  land,  must  be 
assessed  according  to  location.  But  all  these  rules  are  only 
an  approximation  to  the  ideally  correct  principle. 

In  the  case  of  business — whether  individual  or  corporate 
—  America  is  as  yet  in  the  rear  of  some  of  the  European 
states.  In  purely  local  taxation  the  American  commonwealths 
generally  levy  the  whole  tax  at  the  place  of  the  principal  office, 
although  most  of  the  business  profits  may  be  earned  in  other 
places  within  the  state.  In  the  case  of  corporation  taxes, 
however,  a  few  states  now  pursue  the  more  sensible  policy 
of  taxing  the  domestic  corporation  on  that  part  of  its  capi- 
tal or  earnings  only  which  is  employed  or  received  within 
the  state.  This  is  perhaps  as  near  as  we  can  get  at  the  pre- 
sent time  to  any  practicable  solution. 

2.  Shall  a  non-resident  citizen  be  taxed  on  his  property 
abroad  or  on  his  income  from  abroad? 

This  seems  to  involve  a  great  stretching  of  the  principle  of 
political  allegiance ;  yet  we  find  it  to  be  the  practice  at  the 
present  day  in  international  relations.  For  instance,  in  the 
national  income  tax  of  1894  in  the  United  States,  an  Amer- 
ican was  taxed  on  his  whole  income,  whether  he  resided  in 
America  or  abroad.  Some  states,  however,  like  England  and 


116  ESSAYS  IN  TAXATION 

Austria,  do  not  carry  the  doctrine  of  citizenship  to  this 
point,  —  they  make  no  attempt  to  tax  a  non-resident  citizen 
on  his  foreign  income.  Other  countries  cling  only  nominally 
to  the  principle,  by  providing  for  a  remission  of  taxes  in  case 
the  citizen  is  actually  taxed  abroad.  And  still  others,  like 
Russia,  compromise  the  matter  by  exempting  the  citizen  after 
he  has  lived  abroad  two  years. 

In  state  and  local  taxation,  the  tendency  is  far  more  evi- 
dent to  settle  the  matter  according  to  the  doctrine  of  economic 
interests.  According  to  this  principle,  there  is  no  imagina- 
ble reason  why  a  non-resident  citizen  should  be  taxed  for  his 
property  abroad.  Moreover,  neither  the  principle  of  location 
nor  that  of  domicile  has  any  application.  Even  if  it  were 
desirable  to  levy  such  a  tax,  it  is  difficult  to  see  how  the  obli- 
gation could  be  enforced,  unless  the  non-resident  happened 
also  to  own  some  real  estate  at  home.  And  even  then,  the 
home  property  would  scarcely  be  liable  for  the  taxes  of  the 
non-resident  on  his  foreign  income. 

3.  Shall  a  non-resident  citizen  be  taxed  on  his  property  at 
home  or  on  his  income  earned  at  home  ? 

Here,  again,  the  ideal  solution  would  be,  as  in  the  first 
case,  that  the  home  government  should  levy  not  the  entire 
tax,  but  only  the  greater  part,  leaving  a  small  share  to  the 
foreign  government.  But  in  default  of  such  an  arrange- 
ment, the  most  practicable  method  is  for  the  home  govern- 
ment to  levy  the  whole  tax,  and  to  trust  to  the  foreign 
government  to  avoid  double  taxation. 

As  a  matter  of  fact,  this  is  the  practice  in  international 
relations.  Almost  everywhere  the  income  earned  at  home  is 
taxable  even  though  the  citizen  lives  abroad ;  for  in  this  case 
the  principles  of  citizenship  (or  political  allegiance)  and  of 
location  come  together.  In  state  and  local  taxation,  how- 
ever, the  practice  is  considerably  modified  by  the  principle 
of  domicile,  as  applied  to  certain  forms  of  personalty  or 
income.  We  have  seen  the  practice  in  America  in  regard 
to  property;  and  in  the  few  cases  of  income  taxation,  the 
custom  is  still  further  restricted.  In  Massachusetts  and 


DOUBLE  TAXATION"  117 

Virginia,  for  instance,  the  income  tax  applies  only  to  resi- 
dents. 

4.  Shall  a  resident  alien  be  taxed  on  his  property  or  income 
in  the  state  of  residence  f 

This,  together  with  the  two  following  cases,  is  the  reverse 
of  the  preceding  cases.  It  is  indeed  evident  that  the  alien 
should  not  be  treated  with  greater  favor  than  the  citizen. 
Accordingly,  if  the  non-resident  citizen  be  taxed,  the  resident 
alien  should  certainly  not  be  exempt  in  so  far  as  the  same 
property  is  concerned.  In  international  relations  most  states 
have  here  abandoned  the  doctrine  of  political  allegiance. 
There  is  no  reason  why  it  should  not  be  abandoned,  for  the 
principles  of  domicile  and  of  location  here  come  together, 
and,  combined,  far  outweigh  that  of  citizenship.  In  state 
and  local  taxation  the  matter  is  somewhat  complicated 
by  a  survival  of  the  old  jealousy  of  strangers.  Not  only  is 
the  resident  alien  taxed,  but  he  is  sometimes  taxed  at  a 
higher  rate  than  the  citizen,  or  is  taxed  when  the  citizen  is 
exempt.  We  find  this,  for  instance,  in  the  United  States 
where  a  higher  rate  is  imposed  on  certain  foreign  companies 
(i.e.  resident  aliens).  A  way  out  of  the  difficulty  has  been 
outlined  in  the  so-called  reciprocal  laws,  according  to  which 
a  state  taxes  resident  aliens  in  the  same  way  that  its  citizens 
resident  in  the  foreign  state  are  there  taxed.1  The  whole- 
some dread  of  reprisals  is  often  sufficient  to  prevent  unjust 
double  taxation. 

5.  Shall  a  resident  alien  be  taxed  on  his  property  abroad  or 
on  his  income  earned  abroad? 

This  case  is  not  quite  so  simple.  We  have  seen  that  if  we 
abandon  the  principle  of  political  allegiance  and  substitute 
that  of  economic  interest,  a  large  part  of  the  tax  should  be 
paid  to  the  country  where  the  property  is  situated,  and  only 
a  small  part  to  the  country  of  domicile.  But  where  this  ideal 
cannot  be  attained,  we  found  it  simpler  to  apply,  as  far  as 
possible,  the  doctrine  of  location. 

In  international  relations  it  is  to  be  noticed  that  almost  all 
1  See  in/ra,  chap,  vi.,  sec.  ii.,  §  2. 


118  ESS  Ays  IN  TAXATION' 

states  have  abandoned  the  doctrine  of  political  allegiance 
and  have  substituted  that  of  domicile.  That  is,  in  England 
and  in  most  of  the  German  states  residents  are  liable  to  the 
income  tax  on  their  whole  income,  whether  they  are  aliens  or 
citizens,  and  whether  the  income  is  derived  from  the  home 
country  or  from  abroad.  This  was  also  the  case  in  the 
recent  income  tax  in  the  United  States.  To  put  it  in  an- 
other way:  when  the  principle  of  citizenship  is  advantageous 
to  a  state,  it  is  applied ;  when  it  is  disadvantageous,  it  is  not 
applied.  Only  a  few  countries  exempt  the  foreign  property 
or  income  of  a  resident  alien.  If  the  foreign  state  applies 
the  principle  of  citizenship  and  the  home  state  the  principle 
of  domicile,  as  is  frequently  the  case,  it  is  not  to  be  wondered 
at  that  there  should  be  so  much  double  taxation. 

In  state  and  local  relations  the  doctrine  of  economic  inter- 
ests has  made  considerably  more  headway.  Little  attention 
is  paid  to  the  question  whether  the  resident  is  a  citizen  or 
a  foreigner,  or  whether  we  are  dealing  with  a  foreign  or 
a  domestic  business  or  corporation.  The  problem  is  solved 
very  much  as  in  the  case  of  the  resident  citizen. 

6.  Shall  a  non-resident  alien  be  taxed  on  his  property  or 
income  in  the  state? 

In  international  relations,  here  again,  the  principle  of  polit- 
ical allegiance  has  been  abandoned,  and  that  of  location  has 
been  substituted.  It  is  the  almost  universal  custom  for 
states  to  levy  a  tax  on  incomes  arising  within  their  borders, 
irrespective  of  the  question  whether  the  recipient  lives  abroad 
or  is  a  foreigner.  The  recent  income  tax  in  the  United  States 
formed  no  exception.  The  difficulty  arises  in  the  practical 
enforcement  of  the  law,  where  the  property  or  the  source  of 
income  does  not  consist  of  tangible  property. 

In  state  and  local  taxation  the  problem  is  comparatively 
simple  as  regards  tangible  property,  which  is  taxed  where 
it  is  located.  But  in  the  case  of  intangible  property,  not 
capable  of  a  situs,  the  question  arises  whether  it  should 
follow  the  domicile  of  the  owner,  and  to  that  extent  be 
beyond  the  jurisdiction  of  the  taxing  power;  or  whether 


DOUBLE  TAXATION'  119 

the  intangible  property  may  not  be  declared  to  have  at 
least  an  economic  situs  in  connection  with  the  tangible 
property  on  which  it  is  based  or  which  it  represents.  In 
so  far  as  corporate  securities  are  concerned,  this  question 
will  be  treated  in  a  subsequent  chapter.  In  the  case  of 
earnings  from  business,  since  there  must  generally  be  an 
office  or  an  agent  in  the  state  through  which  the  earnings 
are  received,  the  alien  (or  foreign  business  or  corporation) 
is  to  that  extent  no  longer  a  non-resident.  But  even  here 
the  principle  of  economic  interest  is  clearly  applicable. 

From  the  above  review,  it  is  evident  that  the  question 
where  a  tax  ought  to  be  imposed  involves  a  rather  simple 
theoretical  problem  and  many  very  difficult  practical  prob- 
lems. It  is  the  same  with  almost  every  question  of  taxation. 
As  a  matter  of  principle,  it  is  easy  to  decide  that  a  man  should 
be  taxed  according  to  his  faculty;  as  a  matter  of  practice, 
it  is  not  so  easy  to  apply  the  principle  of  faculty  in  the 
actual  tax  system.  So  we  have  found  that  in  the  case  of 
double  taxation  due  to  conflicts  of  jurisdiction  the  ideal 
principle  is  that  of  economic  interest  or  economic  alle- 
giance, modified  in  a  few  cases  by  that  of  political  allegiance. 
The  difficulty  arises  when  we  attempt  to  embody  this  prin- 
ciple in  equitable  assessments. 

If  we  observe  the  legislation  of  the  most  progressive 
countries,  we  find,  especially  as  regards  internal  or  federal 
relations,  a  distinct  tendency  toward  the  realization  of  this 
principle.  Economic  interests  are  divided  between  the 
places  of  location,  of  domicile  and  of  residence.  However 
differently  various  states  may  measure  the  relative  impor- 
tance of  each,  there  is  a  steady  progress  toward  the  recog- 
nition of  the  principle.  In  the  case  of  real  estate  the  solution 
is  obvious ;  in  the  cases  of  intangible  personalty,  of  business 
earnings  and  of  interest  from  loans  the  problems  are  far 
more  complicated.  To  work  out  the  solution1  for  each  kind 

1  For  a  study  of  the  practical  problem  as  applied  to  the  corporation  tax, 
see  iw/ra,  chapter  viii.,  sec.  iv.  Of.  in  general  the  monograph  of  Walker. 


120  ESSAYS  IN~  TAXATION 

of  tax  would  take  us  too  far  afield.  But  it  cannot  be  too 
strongly  emphasized  that  in  federal  states  no  satisfactory 
system  of  taxation  can  be  attained  until  two  conditions  are 
realized.  We  need,  in  the  first  place,  a  substantial  interstate 
agreement  to  pursue  the  same  general  policy  in  cases  of 
conflicting  jurisdiction  ;  and  we  need,  in  the  second  place, 
a  virtual  acceptance  of  the  doctrine  of  economic  interests 
in  taxation.  When  once  these  conditions  exist,  it  will  make 
comparatively  little  difference  how  the  principle  is  inter- 
preted. For  if  it  is  everywhere  interpreted  in  the  same 
spirit,  there  can  be  little  double  taxation;  and  with  increased 
experience  we  may  expect  to  find  closer  and  closer  approxi- 
mation to  strict  justice  in  the  application  of  the  principle. 
In  international  relations  we  are  still  very  far  removed  from 
the  ideal ;  in  internal  taxation  —  federal,  state  and  local  — 
the  drift  is  unmistakably  in  the  right  direction. 


CHAPTER   V. 

THE   INHERITANCE  TAX. 

THE  inheritance  tax,1  as  now  understood  in  most  countries, 
is  essentially  the  product  of  modern  democracy.  It  was, 
indeed,  not  unknown  to  antiquity.  In  Rome  the  vicesima 
hereditatium,  a  tax  of  a  twentieth  part  of  inheritances,  was 
imposed  at  the  beginning  of  the  empire  to  pay  the  pensions 
of  the  veteran  soldiers.  In  the  middle  ages  the  relief  and 
the  heriot  were  exacted  by  the  overlord  in  return  for  the 
privilege  of  succeeding  to  the  possession  of  property.  But 
while  the  influence  of  the  mediaeval  idea  is  still  to  be  seen 
in  a  few  of  the  continental  countries  where  the  payment 
is  regarded  as  made  for  the  privilege  of  succession,  the  tax 
is  almost  everywhere  of  independent  and  comparatively 
recent  origin.  In  Holland,  in  France  and  even  in  England, 
parts  of  the  existing  inheritance  taxes  are  survivals  of  the 
system  of  charges  on  transfers  and  transactions.  In  many 
English-speaking  states  the  term  probate  duties  is  still 
employed,  signifying  that  the  original  conception  was  a 
charge  for  the  privilege  of  having  the  will  probated  ;  and 
in  some  places  the  various  forms  of  the  inheritance  tax  are 

1  The  term  inheritance  tax  is  here  used  in  its  popular  sense,  as  a  tax  on 
the  devolution  of  property,  whether  real  or  personal,  whether  by  will  or 
by  intestacy.  By  all  means  the  ablest,  as  it  is  the  only  complete,  discussion 
of  this  topic  from  the  points  of  view  of  economics,  law  and  history  (Ameri- 
can as  well  as  European),  is  to  be  found  in  the  doctor's  dissertation  by  one 
of  my  former  students.  See  The  Inheritance  Tax,  by  Max  West,  sometime 
University  Fellow  in  Finance,  in  Columbia  University  Studies  in  History, 
Economics  and  Public  Law,  vol.  iv.,  no.  2,  1893.  Less  complete  are:  von 
Scheel,  Erbschaftssteu'ern  und  Erbschaftsreform;  Eschenbach,  Erbrechts- 
reform  und  Erbschaftssteuer ;  Krtiger,  Die  Erbschaftsst euer ;  Bacher,  Die 
deutschen  Erbschafts-  und  Schenkungssteuern. 

121 


122  ESSAYS  IN  TAXATION1 

included  among  the  stamp  taxes,  or  taxes  on  transactions. 
But  in  most  countries  the  older  idea  has  been  abandoned, 
and  has  been  supplanted  by  the  view  that  the  tax  must  be 
regarded  rather  as  a  charge  on  the  recipient  of  the  inheri- 
tance than  on  the  transaction  itself.  The  inheritance  tax 
is  to-day  found  primarily  in  democracies  like  those  of  Eng- 
land, Switzerland,  Australia  and  America;  and  in  other 
countries  its  development  has  gone  hand  in  hand  with  the 
spread  of  democratic  ideas. 

It  may  be  asked  why  democracy  should  favor  the  inheri- 
tance tax?  The  answer  depends  upon  the  point  of  view 
from  which  we  regard  democratic  tendencies.  If  we  say, 
as  some  believe,  that  the  trend  of  democracy  is  necessarily 
toward  socialism,  the  answer  is  plain:  the  inheritance  tax  is 
imposed  because  democracy  is  jealous  of  large  fortunes. 
But  if,  on  the  other  hand,  we  hold  with  the  less  pessimistic 
critics  that  modern  democracies  are  endeavoring  simply  to  do 
away  with  the  abuses  that  have  come  down  to  us  from  the 
aristocracies  of  the  past,  we  may  claim  that  the  inheritance 
tax  is  only  a  means  of  securing  equality  in  taxation  and  of 
realizing  the  principle  of  ability  to  pay.  Because  the  tax  has 
frequently  been  urged  by  those  who  are  opposed  to  large  fort- 
unes, it  has  usually  been  overlooked  that  it  may  be  defended 
on  purely  economic  grounds  as  in  complete  harmony  with 
the  general  principles  of  equitable  taxation. 

The  earliest  argument 1  for  the  inheritance  tax  had  its 
origin  in  the  plan  to  abolish  intestate  inheritance ;  that  is, 
to  provide,  when  there  was  no  will,  for  the  devolution  of 
the  property  to  the  state.  This  scheme  was  propounded  in 
the  celebrated  essay  of  Bentham,  entitled  "  Supply  without 
Burden."2 

1  The  fullest  account  of  the  arguments  is  to  be  found  in  the  article  by  Dr. 
Max  West,  "  The  Theory  of  the  Inheritance  Tax,"  Political  Science  Quar- 
terly, viii.,  p.  426  (1893). 

2  The  full  title  is  "  Supply  without  Burden,  or  Escheat  vice  Taxation, 
being  a  proposal  for  a  saving  of  taxes  by  an  extension  of  the  Law  of  Escheat, 
including  strictures  on  Collateral  Succession  comprised  in  the  Budget  of  7th 
December,  1795."     In  Collected  Works,  Bowring's  edition,  ii.,  p.  585. 


THE  INHERITANCE  TAX  123 

The  title  of  the  essay  is  explained  in  the  following  problem: 

"  What  is  that  mode  of  supply  of  which  the  twentieth  part 
is  a  tax,  and  that  a  heavy  one,  while  the  whole  would  be  no 
tax,  and  would  not  be  felt  by  anybody  ?  " 

The  solution  of  the  problem,  according  to  Bentham,  lay  in 
the  abolition  of  intestate  succession  except  in  the  case  of 
immediate  relatives.  To  this  he  added  the  limitation  of  the 
power  of  bequest  of  testators  without  direct  heirs.  The  old 
principle  of  escheat  was  to  be  extended  to  include  the  inher- 
itances or  bequests  then  going  to  collateral  relatives.  But 
Bentham  claimed,  further,  that  the  state  should  have  an  equal 
share  in  the  sums  going  with  or  without  a  will  to  such  close 
relatives  as  grandparents,  uncles  and  aunts,  and  perhaps 
nephews  and  nieces,  as  well  as  a  reversionary  interest  in 
the  succession  of  childless  direct  heirs  without  prospect  of 
children.1 

Bentham  held  that  this  was  not  a  tax,  and  that  precisely 
in  this  fact  lay  its  chief  advantage,  —  that  of  "  unburthen- 
someness,"  or,  as  we  would  say,  freedom  from  oppressiveness. 
According  to  the  general  principles  of  human  nature,  said 
he,  a  man  is  led  in  the  case  of  a  tax  on  successions  to  look 
upon  the  whole  of  what  is  left  to  him  as  his  own,  of  which  he 
is  then  called  upon  to  give  up  a  part.  But  if  under  the  law 
regulating  successions  he  knows  that  nothing,  or  only  a  small 
share,  is  due  him,  Bentham  claimed  that  he  would  suffer  no 
hardship.  "  For  hardship  depends  on  disappointment ;  dis- 
appointment upon  expectation,  and  if  the  law  of  succession 
leaves  him  nothing,  he  will  not  expect  anything."2 

1  The  plan  is  defined  to  be  "  the  appropriating  to  the  use  of  the  public  all 
vacant  successions,  property  of  every  denomination  included,  on  the  failure 
of  near  relations,  will  or  no  will,  subject  only  to  the  power  of  bequest,  in 
respect  of  the  half  of  whatever  property  would  be  at  present  subject  to  that 
power." 

2  As  he  puts  it  in  another  place :  "  The  riddle  begins  to  solve  itself:  a 
part  taken  and  a  sense  of  burthen  left ;   the  whole  taken  and  no  such 
effect  produced ;  the  effect  of  a  part,  greater  than  the  effect  of  a  whole ; 
the  old  Greek  paradox  verified,  the  part  greater  than  the  whole.     Suffer  a 
mass  of  property  in  which  a  man  has  an  interest  to  get  into  his  hands,  his 
expectation,  his  imagination,  his  attention  at  least  fastens  upon  the  whole. 


124  ESSAYS  IN  TAXATION" 

Exaggerated  as  Bentham's  distinction  undoubtedly  is,  it 
contains  a  kernel  of  truth;  namely,  that  there  is  no  such  thing 
as  a  natural  right  of  inheritance,  and  that  the  extension  of 
intestate  succession  to  collateral  relatives  is  under  existing 
social  conditions  defensible  only  to  a  very  limited  extent. 
Whatever  may  have  been  the  original  family  theory  of 
property,  it  may  be  argued  with  some  force  that  the  bonds 
of  the  wider  patriarchal  family  life  have  been  considerably 
loosened  in  modern  times,  and  that  the  family  consciousness 
extends  nowadays  only  to  the  nearest  relatives. 

While  Bentham  looked  upon  the  matter  primarily  from  the 
point  of  view  of  escheat,  it  was  but  a  step  to  extend  the  argu- 
ment, and  to  say,  as  many  writers  now  do,  that,  since  it  is  ex- 
ceedingly difficult  to  draw  a  sharp  line  where  the  family 
consciousness  ends,  it  is  more  just  and  more  practicable  for 
the  state  to  take  away  a  small  part  from  direct  relatives  and 
an  increasingly  larger  sum  from  the  more  remote  relatives. 
The  tax,  in  other  words,  would  be  graduated  according  to  the 
degree  of  relationship.  What  was  originally  nothing  but  an 
extension  of  escheat,  thus  grew  into  the  idea  of  a  graduated 
collateral  inheritance  tax.  Even  Bentham  himself,  although 
protesting  against  the  use  of  the  word  tax,  virtually  advo- 
cated a  graduated  tax  when,  as  we  have  seen,  he  proposed 
the  exemption  of  direct  heirs ;  the  confiscation  of  fifty  per 
cent  from  grandparents,  uncles  and  aunts;  and  the  seizure 
of  the  whole  in  case  of  intestacy.  Thus  the  extension-of- 
escheat  argument,  which  was  meant  originally  to  apply  only 
to  intestacy,  has  been  made  to  include  also  a  limitation  of 
the  power  of  bequest. 

A  supposed  variation  of  this  line  of  reasoning  is  seen  in 
what  is  called  the  theory  of  state  co-heirship.  It  originated 
with  Bluntschli,  who  used  the  expression  staatliches  Miterb- 

Take  from  him  afterward  a  part  .  .  .  the  parting  with  it  cannot  but  excite 
something  of  the  sensation  of  a  loss.  .  .  .  Take  from  him  now  (I  should 
not  say  take),  but  keep  from  him  the  whole,  so  keeping  it  from  him  that 
there  shall  never  have  been  a  time  when  he  expected  to  receive  it ;  all 
hardship,  all  suffering,  is  out  of  the  case." 


THE  INHERITANCE  TAX  125 

recht,  and  has  found  its  way  into  some  recent  treatises. 
Sometimes  Bentham  is  cited  as  the  originator  of  the  doctrine, 
but  this  is  a  mistake.  As  Dr.  West  so  well  puts  it :  — 

Bentham's  plan  was  to  abolish  intestate  inheritance  except 
between  immediate  relatives,  to  restrict  the  power  of  bequest  of 
testators  having  no  direct  heirs,  and  to  give  the  state  a  part  of 
the  property  of  decedents  in  certain  cases.  He  called  the  system 
which  he  proposed  an  extension  of  escheat,  and  based  it  not  upon 
any  right  of  inheritance  in  the  state,  but  upon  the  absence  of  any 
reason  for  the  operation  of  intestate  inheritance  between  individuals 
not  closely  related.  It  is  therefore  a  mistake  to  call  Bentham  a  rep- 
resentative of  the  theory  of  state  co-heirship.  But  later  writers 
have  combined  with  his  argument  the  thought  that  the  state  should 
inherit  property  from  individuals  because  of  what  it  does  for  them 
during  their  lives.  The  state  is  sometimes  represented  as  a  larger 
family ;  according  to  Umpfenbach,  the  bond  of  kinship  between 
distant  relatives  loses  itself  in  the  whole  nation,  which  therefore 
inherits  the  property  of  individuals  as  the  family  inherits  the 
property  of  its  members.  Such  expressions  as  these,  however, 
must  be  regarded  as  metaphorical  rather  than  scientific.  The 
state  may  acquire  property  by  escheat,  but  not  by  inheritance. 
Inheritance  implies  kinship,  and  the  modern  state  is  not  a  genetic 
association.  The  representation  of  the  state  as  co-heir  is  either  a 
mere  figure  of  speech  (and  as  such  it  is  as  old  as  Pliny),  or  else 
it  results  from  a  confusion  of  inheritance  and  escheat.  Inheri- 
tance is  not  a  matter  of  public  law;  it  is  for  private  law  to  pre- 
scribe how  far  inheritance  shall  be  permitted  between  individuals, 
and  for  public  law  to  ordain  that  where  inheritance  ends  escheat 
shall  begin.1 

We  now  come  to  the  second  theory,  which  may  be  called 
the  socialistic  or  diffusion-of-wealth  theory.  It  is  based 
upon  the  doctrine  that  it  is  the  function  of  government  to 
use  the  power  of  taxation  as  an  engine  of  social  reparation 
in  checking  the  growth  of  large  fortunes  and  in  bringing 
about  a  more  equal  distribution  of  wealth. 

In  its  origin  this  theory  was  not  socialistic.  John  Stuart 
Mill  accepted  Bentham's  reasoning,  but  developed  it.  Since 
1  Political  Science  Quarterly,  viii.,  p.  436. 


126  ESSAYS  IN  TAXATION 

he  did  not  consider  the  right  of  inheritance  as  necessarily 
involved  in  the  private  ownership  of  property,  he  desired  to 
extend  the  abolition  of  intestate  succession  to  direct  heirs,  as 
well  as  to  collateral  relatives.  Moreover,  even  in  the  case 
of  a  will,  no  one,  he  thought,  was  justified  in  demanding 
more  than  a  fair  competence.  His  plan  was  as  follows  :  — 

Freedom  of  bequest  as  the  general  rule,  but  limited  by  two 
things ;  first,  that  if  there  are  descendants,  who,  being  unable  to 
provide  for  themselves,  would  become  burthensome  to  the  state, 
the  equivalent  of  whatever  the  state  would  accord  to  them  should 
be  reserved  from  the  property  for  their  benefit:  and  secondly, 
that  no  one  person  should  be  permitted  to  acquire  by  inheritance 
more  than  the  amount  of  a  moderate  independence.  In  case  of 
intestacy,  the  whole  property  to  escheat  to  the  state:  which 
should  be  bound  to  make  a  just  and  reasonable  provision  for 
descendants,  that  is,  such  a  provision  as  the  parent  or  ancestor 
ought  to  have  made,  their  circumstances,  capacities,  and  mode  of 
bringing  up  being  considered.1 

This  argument  is  not  necessarily  socialistic  ;  but  it  is  per- 
haps open  to  question  on  other  grounds.  It  may  be  regarded 
as  opposed  to  the  family  theory  of  property,  which  even  in  its 
narrower  sense,  assumes  that  as  a  man  acquires  property 
largely  in  order  to  leave  it  to  his  children,  for  whom  he 
ought  to  provide,  there  is  reasonable  ground  for  demanding 
the  perpetuity  of  the  means  of  family  support.  Denial  of  the 
right  of  inheritance  by  direct  heirs  thus  seems  to  involve  an 
attack  upon  the  unity  of  the  family.  On  the  other  hand,  the 
right  of  inheritance  within  the  family  has  already  been  largely 
modified  by  the  freedom  of  bequest;  and  if  a  man  is  at  liberty 
to  give  away  his  whole  fortune  to  outsiders,  we  cannot  well 
speak  of  a  family  right.  In  parts  of  continental  Europe,  in- 
deed, we  have  the  survival  of  the  old  idea  in  the  institution 
of  compulsory  children's  share  {portion  Ugitime,  Pflichttheils- 
rechf).  Even  in  the  United  States  some  of  the  commonwealth 
laws  prohibit  the  bequeathing  of  more  than  a  certain  portion 

1  Political  Economy,  book  v.,  chap,  ix.,  sec.  i.  Cf.  book  ii.,  chap,  ii.,  sees, 
iii,  iv. 


THE  INHERITANCE  TAX  127 

of  the  estate  to  charitable  or  public  uses  when  there  is  a  child, 
a  widow  or  a  parent.  But,  as  a  general  rule,  in  English- 
speaking  countries  the  right  of  bequest  is  free.  It  is  well 
known  that  inheritance  is  older  than  bequest,  and  that  the 
latter  system  was  introduced  into  the  Roman  law,  not  to 
limit  inheritance,  but  to  provide  heirs  in  default  of  near  rela- 
tives. The  modern  right  of  free  bequest  is,  therefore,  really 
opposed  to  the  older  family  idea  of  property,  which  takes  shape 
in  the  assertion  of  the  right  of  inheritance.  It  thus  becomes 
a  very  difficult  question  to  decide  how  far  inheritance  may  be 
demanded,  as  of  right.  Nevertheless,  it  may  be  said  that 
most  thinkers,  as  well  as  the  mass  of  the  public,  would  still 
to-day  maintain  the  custom  of  inheritance,  not  indeed  as  a 
natural  right  or  as  a  necessary  consequence  of  the  right  of 
private  property,  but  simply  as  an  institution  that  is  on  the 
whole  socially  desirable.  Even  Mill  says  of  his  own  scheme: 
"The  laws  of  inheritance  have  probably  several  phases  of  im- 
provement to  go  through,  before  ideas  so  far  removed  from  pres- 
ent modes  of  thinking  will  be  taken  into  serious  consideration." 

While  there  is  some  scientific  justification  for  the  doctrine 
as  originally  expounded,  it  is  unquestionable  that  most  of  its 
defenders  plant  themselves  squarely  on  the  ground  that  it  is 
the  function  of  the  state  to  check  the  aggregation  of  wealth 
into  a  few  hands,  and  to  provide  for  the  equalization  of  fort- 
unes. These  writers  would  put  a  limit  not  only  to  the  amount 
of  wealth  acquired  through  inheritance  or  bequest,  but  to  the 
amount  acquired  in  any  manner.  No  fortunes  should  exceed 
a  definite  sum.  Such  a  doctrine  is  very  distinctly  socialistic. 
Those  who  are  not  prepared  to  accept  socialistic  premises 
and  socialistic  methods  of  reasoning  cannot  acknowledge  the 
validity  of  the  diffusion-of-wealth  argument. 

While  the  premises  thus  may  be  regarded  as  wrong,  the 
conclusion  may  be  right,  for  the  same  conclusion  may  con- 
ceivably be  drawn  from  utterly  dissimilar  premises.  Just  as 
it  has  been  elsewhere  shown  that  progressive  taxation  may  be 
upheld  by  decided  opponents  of  socialism,1  so  it  can  be  shown 

1  See  my  work  on  Progressive  Taxation  in  Theory  and  Practice,  pp.  72, 78, 83. 


128  ESSAYS  IN  TAXATION' 

beyond  dispute  that  the  inheritance  tax  may  be  supported 
through  entirely  different  arguments  by  those  who  oppose  the 
doctrine  of  the  diffusion  of  wealth.  Brushing  aside,  there- 
fore, the  socialistic  doctrine  as  inadequate  and  unsound,  let 
us  examine  these  other  arguments. 

The  so-called  cost-of -service  theory,  which  is  occasionally 
found,  treats  the  inheritance  tax  simply  as  a  fee.  The  pro- 
bate courts  are  a  source  of  expense  to  the  government  and  a 
source  of  special  benefit  to  those  that  utilize  their  services. 
What  is  more  reasonable,  then,  than  that  those  who  receive 
the  special  benefit  should  defray  the  cost  ? 

This  argument,  however,  would  justify  only  very  light 
charges,  and  it  would  result  not  so  much  in  an  inheritance  tax 
as  in  a  system  of  probate  fees.  Such  probate  fees  are  occa- 
sionally found; 1  but  as  soon  as  they  exceed  the  cost,  the  theory 
is  no  longer  applicable.  The  probate  duty  in  England,  for  in- 
stance, soon  outgrew  its  original  character  of  a  fee.  Another 
objection  to  this  theory  is  that  logically  the  charge  ought  to 
be  regressive,  not  proportional  or  progressive;  that  is,  since  it 
costs  proportionally  less,  to  probate  a  large  sum  than  a  small 
sum,  the  rate  ought  to  be  lower  on  a  large  inheritance  than  on 
a  small  one  —  or,  at  all  events,  it  ought  not  to  grow  with  the 
size  of  the  inheritance.  As  a  matter  of  fact,  the  inheritance 
tax  of  1889  in  Wisconsin  was  regressive.2 

A  somewhat  more  substantial  theory  is  that  which  con- 
siders the  inheritance  tax  as  the  price  of  a  special  privilege. 
It  is  regarded  not  so  much  as  a  fee  paid  to  defray  the  cost 
of  government  services  as  a  charge  proportioned  to  the  ad- 
vantages that  accrue  to  the  recipient  of  the  inheritance. 
From  the  legal  point  of  view,  this  has  much  to  recommend  it. 
In  the  United  States,  for  instance,  if  regarded  as  a  tax  on 

1  So  in  the  American  commonwealths,  as  Wisconsin,  Minnesota,  Illinois 
and  New  Hampshire. 

2  Estates  not  exceeding  $3000  were  exempt;  up  to  $500,000  they  paid 
one-half  of  one  per  cent ;  on  the  excess  above  this,  one-tenth  of  one  per  cent. 
The  charge  was  declared  to  be  "  in  lieu  of  fees,"  but  it  was  held  to  be  a  tax, 
and  therefore  unconstitutional  because  applicable  only  to  one  county.     76 
Wis.  469.    See  West,  op.  cit.,  p.  77. 


THE  INHERITANCE  TAX  129 

property,  the  charge  would  conflict  with  the  constitutional  pro- 
vision found  in  many  commonwealths,  requiring  all  property 
to  be  taxed  equally.  If  a  general  property  tax  were  levied, 
and  then  an  additional  inheritance  tax  were  imposed,  we  should 
have  technically  unequal  taxation  of  some  property.  Again, 
the  tax,  if  imposed  by  the  federal  government,  would  militate 
against  that  section  of  the  constitution  which  requires  all  di- 
rect taxes  to  be  apportioned  according  to  population.  Accord- 
ingly, many  of  the  American  states  have  contrived  to  uphold 
the  constitutionality  of  the  tax  only  by  declaring  it  to  be  a  tax 
on  the  devolution  of  property.  It  is  a  tax  not  on  wealth,  but 
on  the  transfer  of  wealth.  So  the  Louisiana  inheritance  tax 
was  originally  upheld  by  the  federal  Supreme  Court  as  a 
simple  regulation  of  inheritance.1  But  since  the  federal  gov- 
ernment possesses  no  constitutional  power  to  regulate  inheri- 
tances, the  federal  inheritance  tax  was  sustained  as  being 
neither  such  a  regulation  nor  a  direct  tax  on  the  land,  but  an 
excise  on  the  right  to  succeed  to  the  ownership  of  property.2 

From  the  economic  point  of  view,  there  is  only  a  slight 
justification  for  this  contention.  It  is  true  that  in  some 
countries  the  inheritance  tax  is  still  regarded  as  an  indirect 
tax  on  transactions  or  transfers.  So  regarded,  it  should 
be  our  aim  to  abolish,  rather  than  to  develop,  the  tax, 
in  conformity  with  the  general  tendency  of  modern  reform 
to  restrict  the  scope  of  taxes  on  acts  and  transactions  to 
their  narrowest  limits.  To  regard  the  tax  as  a  charge  on 
the  mere  privilege  of  succession,  measured  according  to  the 
special  benefits  accruing  to  the  successor,  is  to  revert  to  the 
protection  or  insurance  theory  of  taxation,  which  has  been 
discarded  in  modern  fiscal  science.  To  regard  it  simply  as 
an  indirect  tax  on  transfers  is  to  stamp  it  with  the  disap- 
proval of  the  democratic  movement  which  seeks  to  mini- 
mize taxes  on  communication  and  exchange. 

There  remains  only  the  theory  which  regards  the  inheri- 
tance tax  as  a  direct  tax  on  the  recipient  of  the  inheritance. 
If  we  grant  that  the  basis  of  taxation  is  the  faculty  of 

1  Mager  vs.  Grima,  8  How.  490.  2  Scholey  vs.  Rew,  23  Wall.  331. 


130  ESSAYS  IN  TAXATION 

the  individual,  it  is  evident  that  any  addition  by  inheritance 
to  the  wealth  of  the  individual  increases  his  ability  to  pay. 
If  we  grant,  further,  that  the  best  test  of  faculty  is  the  revenue 
of  the  individual,  it  is  clear  that  this  accretion  to  his  revenue 
is  of  a  peculiar  character.  Income,  as  the  term  is  commonly 
employed,  denotes  a  regular  periodic  return ;  but  an  inheri- 
tance is  an  irregular,  a  spasmodic,  a  chance  return.  In  a 
logical  income  tax:  there  is  no  room  for  such  accidental  or 
fortuitous  revenues.  Yet  they  clearly  add  to  the  ability  of 
the  individual,  just  as  the  chance  gains  from  speculation  un- 
doubtedly increase  the  faculty  of  the  taxpayer.  From  this 
point  of  view,  the  inheritance  tax  may  best  be  defended  by 
the  accidental  or  fortuitous-income  argument. 

It  may  be  claimed  that  there  are  possible  cases  where 
this  argument  is  inapplicable.  Thus,  after  a  man's  death,  his 
widow  or  children  may  have  to  depend  entirely  on  the  income 
from  his  property,  where  before  his  death  they  enjoyed  not 
only  this  sum  but  also  the  additional  income  due  to  his  per- 
sonal exertions.  The  family  ability  to  pay  may  be  diminished, 
not  increased.  It  may  be  answered  that  the  state  deals  with 
individuals,  not  with  families,  and  that  the  individual  mem- 
bers now  have  incomes  where  before  they  had  none.  And 
even  if  we  concede  this  claim,  the  difficulty  can  be  met  by 
exempting  a  certain  amount,  and  imposing  a  progressive  tax 
on  the  remainder.  For  in  proportion  as  the  family  income 
was  derived  from  property,  rather  than  from  the  labor  of  the 
head  of  family,  the  share  due  to  his  influence  becomes  corre- 
spondingly smaller,  and  the  loss  due  to  his  absence  will  be 
less  keenly  felt;  while,  on  the  other  hand,  the  family  expenses 
themselves  are  diminished  by  his  death.  Finally,  in  propor- 
tion as  the  inheritance  goes  to  self-supporting  direct  heirs  or 
to  collateral  relatives,  it  may  be  maintained  with  truth  that 
there  is  a  decided  increase  in  tax-paying  ability. 

When,  therefore,  we  have  a  system  of  income  taxes,  the 
inheritance  tax  may  be  regarded  as  a  supplementary  tax 
to  reach  the  real  ability  of  the  individual.  Moreover,  it  may 
be  regarded  as  a  convenient  method  of  applying  the  principle 


THE  INHERITANCE  TAX  131 

of  differentiation  in  the  taxation  of  income.  It  is  now  com- 
monly recognized  that  incomes  from  property  should  pay  a 
higher  rate  than  incomes  from  labor.  Instead  of  making 
a  difference  in  the  rates  to  reach  this  end,  the  proportional 
income  tax  may  be  supplemented  by  a  property  tax;  or  where 
this  is  for  any  reason  undesirable,  by  the  inheritance  tax. 
The  latter  would  then  serve  the  double  purpose  of  reaching 
not  only  accidental  incomes,  but  also  property  incomes,  since 
all  inheritances  take  the  shape  of  property. 

Even  in  those  states  where  the  chief  direct  tax  is  that  on 
general  property,  the  inheritance  tax  may  be  defended  on  the 
accidental-income  theory  For  in  so  far  as  property  is  at  all 
an  adequate  test  of  faculty  in  taxation,  it  is  simply  a  mode  of 
estimating  the  regular  revenue  or  income.  Accidental  in- 
come is  as  little  taken  note  of  in  a  property  tax  as  in  an  income 
tax.  In  fact,  as  between  the  two  systems,  an  inheritance  tax  is 
more  necessary  to  supplement  the  former  tax  than  the  latter. 

An  additional  theory  which  has  been  advanced  more  re- 
cently is  the  so-called  back-tax  theory.  Since  general  prop- 
erty taxes  are  to  a  large  extent  evaded  during  life,  it  is  said  to 
be  no  more  than  just  that  the  property  should  be  made  to  pay 
when  the  tax  cannot  be  evaded.  But  in  this  case  it  is  the  prop- 
erty of  the  decedent,  rather  than  the  ability  of  the  heir, 
that  is  considered.  Moreover,  the  validity  of  the  argument 
is  questionable  chiefly  because  it  is  well-nigh  impossible  to 
prove  the  relation  between  the  amount  of  the  inheritance 
tax  and  the  aggregate  of  taxes  evaded  during  life.  In  the 
United  States,  for  example,  taxes  on  realty  are  generally  paid; 
it  is  the  tax  on  personalty  that  is  evaded.  The  inheritance 
tax  ought  then  to  take  the  shape  only  of  a  tax  on  the  succes- 
sions to  personal  property.  As  an  actual  fact,  this  is  the  case 
in  New  York  in  the  direct  inheritance  tax,  and  was  true  of 
the  federal  income  tax  of  1894.  The  reasoning,  therefore, 
does  not  apply  to  real  estate  at  all.  Finally,  in  proportion  as 
other  taxes  are  substituted  for  the  personal  property  taxes,  the 
argument  falls  away.  Where  there  is  a  property  tax  or  an  in- 
come tax,  there  may  well  be  some  provision  for  an  inventory  of 


132  ESSAYS  IN  TAXATION 

the  estate  after  death  (as  in  Switzerland  and  Germany),  with 
severe  penalties  for  the  evasion  of  back  taxes.  But  such  a  pro- 
vision is  entirely  independent  of  the  inheritance  tax. 

The  theory  sometimes  advanced *  that  the  inheritance 
tax  is  to  be  regarded  as  a  capitalized  income  tax  paid  once 
and  for  all  at  the  close  of  life,  instead  of  in  small  amounts 
during  each  year,  is  not  so  strong.  In  the  first  place,  the 
existing  tax  system  either  does,  or  does  not,  reach  the  in- 
come or  property  of  the  living  taxpayer.  If  it  does,  as 
it  ought  to  do,  to  capitalize  what  has  already  been  paid 
involves  double  taxation.  If  it  does  not,  the  tax  is  still 
objectionable  on  the  score  of  inequality,  because  when  two 
people  with  the  same  fortune  die  at  different  ages  and  pay 
the  same  tax,  the  amount,  if  regarded  as  a  capitalized  in- 
come tax,  would  mean  a  very  divergent  rate  of  income  tax. 
If  the  tax  payable  by  A,  who  has  enjoyed  his  income  forty 
years,  is  equivalent  to  the  capitalization  of  a  five  per  cent 
income  tax,  the  amount  payable  by  B,  who  has  enjoyed  his 
income  only  ten  years,  would  be  tantamount  to  a  twenty 
per  cent  income  tax.  An  inheritance  tax,  from  this  point 
of  view,  would  be  grossly  unjust.  This  objection,  due  to 
the  varying  frequency  of  the  transfer,  was  first  made  by 
Adam  Smith,  but  is  applicable  only  when  the  tax  is  con- 
sidered as  a  property  or  capitalized  income  tax.  According 
to  either  the  price-of -devolution  argument  or  the  accidental- 
income  argument,  the  frequency  of  transfer  is  immaterial ; 
for  the  tax  is  paid  each  time  by  a  different  person,  —  and 
it  is  the  person,  not  the  property  as  a  whole,  that  is  responsi- 
ble.2 Finally,  under  the  capitalized-income  theory  no  gradu- 
ation according  to  relationship  would  be  possible.  In  short, 
the  whole  theory  seems  defective. 

The  logical  defence  for  the  inheritance  tax  is  thus  the 
accidental-income  argument.  It  is  in  harmony  with  the 

1  Bastable,  Public  Finance,  p.  626. 

2  Some  states,  however,  provide  for  this  supposed  inequality  by  exempting 
the  second  devolution,  if  it  takes  place  within  a  certain  number  of  years. 
Chili  fixes  the  term  at  ten  years.     See  West,  op.  cit.,  p.  33. 


THE  INHERITANCE  TAX  133 

general  basis  of  taxation  —  the  faculty  or  ability  of  the  indi- 
vidual to  pay ;  it  rounds  out  the  existing  system,  whether 
based  on  property  or  on  income  ;  and  it  is  not  open  to  the 
objections  which  may  be  urged  in  one  form  or  another 
against  each  of  the  other  theories. 

Granting  the  desirability  of  the  tax,  we  are  at  once  con- 
fronted by  the  problem  of  graduated  or  progressive  taxation. 
Graduation  of  the  tax  according  to  relationship  has  met 
with  well-nigh  universal  acceptance ;  graduation  of  the 
tax  according  to  amount  has  given  rise  to  more  contro- 
versy. This  question  has  been  fully  discussed  in  another 
place  l  with  the  conclusion  that  the  theory  of  progression  is 
more  applicable  to  the  inheritance  tax  than  to  any  other  part 
of  the  fiscal  system  ;  and  that,  whether  we  base  our  demand 
on  the  limitation-of-inheritance  theory,  the  faculty  theory, 
or  the  compensatory  theory,  some  scale  of  progression  is  both 
desirable  and  practicable. 

The  inheritance  tax  to-day  scarcely  needs  defence.  It  is 
found  in  almost  every  country ;  and  the  more  democratic 
the  country,  the  more  developed  is  the  tax.  In  some 
of  the  Canadian  provinces,  in  the  Australian  colonies,  in 
the  Swiss  cantons,  in  England  itself,  the  rates  are  not  only 
progressive,  but  highly  progressive.  The  recent  reforms  in 
England  are  fully  described  in  another  chapter.2  In  the 
United  States  also,  there  is  now  a  decided  movement  toward 
the  progressive  inheritance  tax.  The  collateral  inheritance 
tax  is  now  (1900)  found  in  twenty-one  commonwealths.3 

1  Cf.  the  author's  work  on  Progressive  Taxation,  pp.  213,  215. 

2  Infra,  chap.  x. 

8  The  date  when  first  imposed  is  put  in  brackets  :  California  [1893],  Con- 
necticut [1889],  Delaware  [1869],  Illinois  [1887,  only  for  Cook  County ;  1895, 
for  the  state],  Iowa  [1896],  Maine  [1893],  Maryland  [1845],  Massachusetts 
[1891],  Michigan  [1899],  Minnesota  [1897],  Missouri  [1899],  Montana 
[1897],  New  Jersey  [1892],  New  York  [1885],  Ohio  [1893],  Pennsylvania 
[1826],  Tennessee  [1891],  Vermont  [1896],  Virginia  [1844  to  1884,  again 
in  1896],  West  Virginia  [1887],  and  Wisconsin  [1899].  The  tax  was  declared 
unconstitutional  in  the  following  states  in  the  years  mentioned  in  brackets  : 
Louisiana  [1899],  Michigan  [1894],  Minnesota  [1875],  Missouri  [1898],  New 
Hampshire  [1878],  and  Wisconsin  [1890];  but  in  four  of  these  six  cases  the 


134  ESSAYS  IN  TAXATION" 

The  direct  inheritance  tax  exists  in  seven  commonwealths,1 
the  rates  being  one  per  cent  in  every  case  except  that  of 
Connecticut,  where  it  is  one-half  of  one  per  cent.  In  four 
of  these  seven  commonwealths  110,000  is  exempted,  while 
in  Michigan  the  exemption  is  fixed  at  $5,000,  in  Montana 
$7,500,  and  in  Illinois  at  $20,000.  The  direct  tax  applies 
exclusively  to  personal  property  in  every  case  except  Con- 
necticut and  Illinois,  where  it  affects  all  property.  But  it 
will  be  remembered  that  in  Connecticut  the  rate  is  low,  and 
that  in  Illinois  the  exemption  is  high.  The  only  case  in 
which  the  progressive  principle  has  been  applied  to  the 
direct  tax  is  that  of  Ohio,  where  the  law  of  1894  was  declared 
unconstitutional  for  that  reason  in  the  following  year.  On 
the  other  hand  the  progressive  principle  has  been  applied 
to  the  collateral  tax  in  two  cases  —  Missouri  and  Illinois. 
The  Missouri  law  of  1895  was  overthrown  in  the  following 
year,  but  the  more  important  and  more  radical  law  of 
Illinois  of  the  same  year  was  upheld  not  only  by  the  state 
court  but  also  by  the  federal  court,  in  what  has  become  a 
leading  case.2  Under  this  decision,  the  principle  of  progres- 
sion is  applicable  to  the  direct  taxes  as  well.  Partly  as  a 

constitutional  objections  were  obviated  by  later  laws  which,  as  indicated 
above,  now  exist  in  Michigan,  Minnesota,  Missouri  and  Wisconsin.  The 
tax  at  one  time  existed,  but  was  abolished,  in  Alabama  [1848  to  1868], 
Louisiana  [1828  to  1877,  again  in  1894  for  foreign  heirs,  but  pronounced  un- 
constitutional in  1899],  North  Carolina  [1847  to  1884],  Virginia  [1848  to  1884, 
but  re-enacted  in  1896]. 

1  The  date  when  first  imposed  is  put  in  brackets :  Connecticut  [1897], 
Illinois  [1895],  Michigan  [1899],  Minnesota  [1897],  Montana  [1897],  New 
York  [1891],  and  Wisconsin  [1899].     The  direct  tax  was  declared  unconsti- 
tutional in  the  following  cases,  partly  for  special  reasons,  partly  because 
of  the  exemptions  or  progressive  features:    Ohio  [law  of  1894  in  1895], 
Michigan  [law  of  1893  in  1894],  Pennsylvania  [law  of  1897  in  1899]. 

2  Kochesperger  vs.  Drake,  167  111.  122 ;  Magoun  vs.  Trust  and  Savings 
Bank,  170  U.  S.  283. 

The  rates  of  the  Illinois  tax  are  as  follows  :  For  direct  heirs,  one  per  cent 
on  the  excess  above  $20,000 ;  for  uncles,  aunts,  nephews,  nieces,  and  their 
descendants,  two  per  cent  on  the  excess  above  $20,000 ;  in  all  other  cases, 
the  exemption  is  $500  and  the  rates  are :  from  $500  to  $10,000,  three  per 
cent ;  $10,000  to  $20,000,  four  per  cent ;  $20,000  to  $50,000,  five  per  cent ; 
over  $50,000,  six  per  cent. 


THE  INHERITANCE  TAX  135 

consequence  of  this  decision  a  number  of  progressive  inher- 
itance tax  bills  have  recently  been  introduced  in  several 
commonwealths,  while  the  principle  itself  has  been  applied 
both  to  the  direct  and  to  the  collateral  inheritance  taxes 
unfortunately  levied  by  the  federal  government  since  1898. 1 
I  say  unfortunately,  because  the  entrance  of  the  federal 
government  into  a  field  so  well  occupied  by  the  separate 
states  will  tend  seriously  to  complicate  the  problem  of  tax 
reform  within  the  commonwealths  themselves. 

A  comparison  of  the  recent  fiscal  development  in  demo- 
cratic states  would  not  be  uninstructive.  In  only  three 
countries  does  the  old  general  property  tax  still  survive  — 
in  Switzerland,  in  Australia  and  in  the  United  States ;  and 
in  all  three  the  system  has  become  so  defective  that  it  has 
been  supplemented  by  other  sources.  The  Swiss  cantons 
first  developed  the  income  tax,  then  the  inheritance  tax,  and 
have  only  recently  been  paying  attention  to  the  corporation 
tax.  The  Australian  colonies  were  first  in  the  field  with 
the  inheritance  tax,  later  developed  the  income  tax,  and  have 
scarcely  yet  realized  the  importance  of  the  corporation  tax. 
The  American  commonwealths,  finally,  were  the  first  to 
introduce  the  corporation  tax,  have  more  recently  turned 
their  attention  to  the  inheritance  tax,  and  have  done  little 
more  than  to  debate  the  income  tax.  The  differences  are 
suggestive,  but  are  easily  explicable  when  we  recall  the 
economic  conditions  in  each  country.  With  all  the  varia- 
tions in  detail,  it  is  clear  that  the  democratic  trend  is  in 
one  general  direction ;  and  it  is  more  than  probable  that 
progressive  inheritance  taxes  will  play  by  no  means  an 
insignificant  r61e  in  the  fiscal  systems  of  the  future. 

1  The  federal  tax  applies  only  to  personal  property  over  $10,000.  On 
estates  between  $10,000  and  $25,000,  the  rate  varies  according  to  five  classes 
of  relationship,  from  three-quarters  of  one  per  cent  to  five  per  cent.  On 
estates  from  $25,000  to  $100,000,  these  rates  are  increased  one-half ;  from 
$100,000  to  $500,000  they  are  multiplied  by  2  ;  from  $500,000  to  $1,000,000 
by  2| ;  over  $1,000,000  by  3.  On  the  highest  amounts  the  tax  thus  varies 
from  two  and  a  quarter  to  fifteen  per  cent.  The  total  tax,  federal  and  state, 
would  thus  in  several  states  amount  to  twenty  or  twenty-one  per  cent 


CHAPTER  VI. 

THE  TAXATION  OF  CORPORATIONS. 

I. 

THE  HISTORY. 

IN  a  previous  chapter  we  have  considered  the  inadequacy 
and  practical  failure  of  the  general  property  tax.  In  all  ages 
and  in  all  countries  it  has  been  found  almost  impossible  to 
reach  intangible  personalty.  What  has  always  been  a  diffi- 
cult task  has  become  immensely  complicated  to-day  through 
the  growth  of  the  modern  corporation.  At  present,  espe- 
cially in  industrial  countries,  the  far  greater  part  of  the 
personalty  in  the  hands  of  individuals  consists  of  intangible 
property  —  mainly  of  corporate  securities.  The  first  reform 
of  our  direct  taxation,  therefore,  is  conceded  by  all  to  lie 
in  this  direction.  Governments  are  everywhere  confronted 
by  the  question  how  to  reach  the  taxable  capacity  of  the 
holders  of  these  securities,  or  of  the  associations  themselves. 
Whom  shall  we  tax  and  how  shall  we  tax  them  in  order  to 
attain  a  substantial  justice  ?  Perhaps  no  question  in  the 
whole  domain  of  financial  science  has  been  answered  in  a 
more  unsatisfactory  way.  In  the  United  States  we  have  a 
chaos  of  practice  —  a  complete  absence  of  principle ;  in 
Europe,  with  the  possible  exception  of  England,  the  situa- 
tion is  scarcely,  if  at  all,  better.  Moreover,  in  spite  of  the 
generally  recognized  need  of  reform,  there  has  thus  far  been 
no  comprehensive  attempt,  from  the  standpoint  of  theory, 
to  evolve  order  out  of  the  chaos  into  which  the  whole  sub- 
ject is  plunged.1 

1  The  only  book  on  this  subject  is  Dietzel's  Die  Besteuerung  der  Aktien- 
gesellschaften  in  Verbindung  mit  der  Gemeinde-Besteuerung,  1859.  This, 
however,  has  no  application  to  American  conditions ;  the  distinctions  it  seeks 
to  make  are  largely  valueless,  and  the  whole  book  is  antiquated. 

136 


137 

The  first  requisite  in  any  scientific  investigation  of  this 
kind  is  to  have  the  facts  ;  for  without  a  knowledge  of  exist- 
ing conditions,  any  propositions  for  reform  would  be  value- 
less. Nevertheless,  the  facts  of  corporate  taxation  have 
never  been  presented  in  their  entirety.  Given  the  laws, 
it  is  necessary  next  to  consider  the  interpretation  put  upon 
them  by  the  courts.1  Even  then  we  have  only  the  legal, 
not  the  economic  view ;  for,  unfortunately,  good  law  is  not 
always  sound  economics.  It  is  therefore  advisable  to  sub- 
ject the  legal  principles  involved  to  an  analysis  from  the 
economic  point  of  view.  Only  after  such  an  examination 
and  comparison  of  the  facts  of  taxation  in  the  United  States 
and  in  Europe,  will  it  be  possible  to  reach  any  conclusions 
that  may  lay  claim  to  scientific  precision.  Only  such  con- 
clusions, arrived  at  through  such  a  method,  should  be  made 
the  basis  for  practical  reforms. 

This  then  is  the  program  of  the  present  series  of  chapters 
on  the  taxation  of  corporations.  The  great  importance  of 
having  all  the  facts  accurately  stated  leads  me  at  the  outset, 
even  at  the  risk  of  tediousness,  to  an  examination  of  the 
history  and  of  the  actual  conditions  of  such  taxation  in  the 
United  States,  while  the  theory  and  criticism  will  be  reserved 
for  future  consideration. 

I.    Early  Taxation  of  Corporations. 

During  the  first  two  decades  of  this  century,  banks  and 
insurance  companies  formed  the  chief  examples  of  corpora- 
tions, apart  from  the  numerous  turnpike  roads  and  toll* 
bridges.  During  the  twenties  and  thirties  the  development 

1  This  chapter,  as  well  as  the  two  immediately  following,  will  con- 
tain few  direct  references  to  the  laws  and  the  legal  decisions.  For  a  full 
statement  of  the  laws  as  they  existed  in  1890  the  reader  is  referred  to  the 
notes  in  the  original  articles  in  the  Political  Science  Quarterly,  vol.  v.,  from 
which  the  present  chapters  are  adapted.  When  the  present  tense  is  used 
in  the  following  pages  it  refers  to  the  conditions  as  they  existed  in  1895,  the 
date  of  the  first  edition  of  this  volume.  Although  there  have  been  several 
changes  in  detail  since  that  date,  the  fundamental  principles  have  remained 
the  same. 


138  ESSAYS  IN  TAXATION 

of  transportation  facilities  led  to  the  creation  of  many  canal 
and  railway  companies ;  and  it  was  not  long  before  many 
other  forms  of  commercial  and  industrial  enterprise  followed 
in  the  same  path  of  incorporation.  The  early  tax  laws  made 
no  mention  of  corporations.  But  as  the  general  property 
tax  was  in  vogue  throughout  all  the  commonwealths,  it  was 
tacitly  assumed  that  the  property  of  artificial  as  well  as  of 
natural  persons  was  liable.  Corporations  were  new  institu- 
tions which  the  legislators  in  happy-go-lucky  fashion,  tried 
to  tax  under  existing  methods,  whether  they  naturally  be- 
longed there  or  not.  Our  Solons  had  neither  the  leisure 
nor  the  inclination  to  make  a  more  careful  study  of  the 
subject. 

The  first  commonwealth  law  which  treated  of  the  taxation 
of  corporations  in  general  was  the  New  York  law  of  1823. 
This  provided  that  "all  incorporated  companies  receiving  a 
regular  income  from  the  employment  of  their  capital  "  should 
be  considered  "  persons  "  liable  to  the  general  property  tax. 
They  were  required  to  make  returns  to  the  county  officers  of 
all  their  property  and  their  capital  stock,  paying  the  tax 
themselves  and  deducting  it  from  the  dividends  of  stock- 
holders. They  might,  however,  commute  the  tax  by  paying 
to  the  treasurers  of  the  counties  where  they  transacted  busi- 
ness ten  per  cent  on  their  "  dividends,  profits,  or  income," 
(which  the  legislator  evidently  presumed  to  be  identical). 
These  taxes  were  paid  by  the  county  officers  to  the  state,  and 
were  then  credited  to  the  counties  in  proportion  to  the  amount 
of  stock  held  within  each  county,  after  deducting  the  state  tax. 

In  1825  and  again  in  1828  the  system  was  slightly  changed 
so  as  to  conform  more  closely  to  the  general  property  tax. 
The  tax  was  made  applicable  to  "all  monied  and  stock 
corporations  deriving  an  income  or  profit  from  their  capital 
or  otherwise."  The  real  estate  of  these  corporations  was 
separately  taxed;  and  in  addition,  they  paid  the  property  tax 
on  their  capital  stock  paid  in  or  secured  to  be  paid  in,  deduct- 
ing the  amount  paid  for  real  estate  and  the  stock  belonging  to 
the  state  and  to  literary  and  charitable  institutions.  Manu- 


THE  TAXATION  OF  CORPORATIONS  139 

f acturing  and  turnpike  companies  paid  on  the  cash  value,  not 
on  the  amount,  of  the  capital  stock ;  turnpike,  bridge  and 
canal  companies,  whose  "  net  income "  did  not  exceed  five 
per  cent  of  the  capital  stock  paid  in,  were  exempted  ;  while 
manufacturing  and  marine  insurance  companies  under  the 
same  conditions  might  commute  by  paying  five  per  cent  of 
their  net  income.  It  is  thus  seen  that  by  this  law  corpora- 
tions were  divided  into  different  classes,  and  that  the  system 
followed  was  the  general  property  tax,  with  the  exceptions 
that  if  a  corporation  had  no  profits  it  paid  no  tax  on  its  stock, 
and  that  certain  classes  might  commute  by  paying  an  income 
tax  to  the  local  officials.  This  remained  the  tax  system, 
except  for  banks  and  for  foreign  insurance  companies,  until 
the  middle  of  the  century. 

In  1853  the  total  exemption  of  non-profit-paying  corpora- 
tions was  abolished  and  all  companies  were  taxed  on  their 
real  estate  and  on  their  capital  stock,  together  with  their 
surplus  profits  or  their  reserved  funds  in  excess  of  ten  per 
cent  of  the  capital,  with  the  same  deductions  as  above.  All 
corporations,  however,  whose  profits  did  not  equal  five  per 
cent  on  the  capital  stock  might  commute  by  paying  five  per 
cent  on  their  "net  annual  profits  or  clear  income."  It  seems 
that  very  few  ever  availed  themselves  of  this  doubtful  privi- 
lege, and  accordingly  in  1857,  the  law  was  again  changed. 
The  principle  of  commutation  was  abandoned ;  and  since 
there  was  no  distinction  between  profitable  and  unprofitable 
companies,  so  far  as  personal  property  was  concerned,  all  cor- 
porations were  taxed  on  their  realty  and  on  the  actual  value 
(not  the  amount)  of  their  capital  stock  plus  the  surplus 
profits  or  reserve  in  excess  of  ten  per  cent  of  the  capital.  In 
addition  to  the  previous  deductions  a  further  abatement  was 
made  for  the  capital  invested  in  taxable  shares  of  other  com- 
panies. The  remainder  was  then  taxed  in  the  same  manner 
as  the  other  personalty  and  realty  of  the  county.  This  re- 
mained the  law  of  New  York,  with  the  exception  of  some 
special  provisions  as  to  banks  and  insurance  companies,  until 
the  recent  changes  in  the  taxation  of  corporations.  These 


140  ESSAYS  IN  TAXATION 

changes,  however,  affect  only  taxation  for  state  purposes, 
leaving  the  local  taxation  still  governed  by  the  provisions 
of  the  law  of  1857.  Foreign  corporations,  however,  are  tax- 
able for  local  purposes,  under  a  law  of  1855,  on  all  sums 
actually  invested  in  the  state. 

It  appears,  then,  that  the  New  York  system  was  a  taxa- 
*  tion  of  the  real  and  personal  property  of  corporations  by  the 
local  assessors,  and  that  the  personal  property  was  virtually 
defined  as  the  capital  stock  not  invested  in  real  estate.  In 
the  other  commonwealths,  where  corporations  were  taxed  at 
all  they  were  included  in  the  general  property  tax ;  and  most 
of  the  laws  lacked  even  such  provisions  as  those  of  the  New 
York  statute  in  reference  to  the  capital  stock.  A  typical 
enactment  of  this  kind  is  the  Connecticut  law  of  1826,  which 
provided  simply  that  the  personal  property  of  a  corporation 
should  be  taxed  in  the  place  where  its  principal  business  was 
transacted.  In  Massachusetts,  on  the  other  hand,  where  the 
first  general  law  was  passed  in  1832,  only  the  real  estate  and 
machinery  of  corporations  were  taxed.  In  lieu  of  the  tax 
on  personalty  there  was  substituted  the  property  tax  on  the 
corporate  shares  in  the  hands  of  individuals,  a  proportionate 
amount  being  deducted  from  each  for  the  part  of  the  capital 
stock  invested  in  machinery  and  in  real  estate.  Even  this 
was  still  in  theory  the  general  property  tax.  In  the  other 
commonwealths,  when  the  corporation  was  taxed,  the  shares 
in  the  hands  of  individuals  were  usually  exempt.  The  only 
state  which  from  the  very  outset  broke  with  the  principle  of 
the  general  property  tax  was  Pennsylvania,  whose  method 
we  shall  learn  a  little  further  on. 

With  this  one  exception,  then,  the  early  principle  of  cor- 
porate taxation  was  the  assessment  of  all  real  and  personal 
property  by  the  local  officials ;  corporations,  in  other  words, 
I  were  taxed  by  the  same  method  as  individuals.     This  primi- 
tive system  has  been  retained  up  to  the  present  day  by  many 
commonwealths  for  almost  all  classes  of  corporations ;  and 
I  in  eight  states,  indeed,  the  constitutions  require  that  cor- 
porate property  be  taxed  in  the  same  manner  as  that  of  indi- 


THE  TAXATION  OF  CORPORATIONS  141 

viduals.1  The  practical  defects  of  such  a  system,  however, 
have  led  to  numerous  changes  in  many  of  the  progressive  states, 
and  the  tendency  is  everywhere  away  from  the  original  plan. 
In  a  previous  chapter  we  have  seen  that  the  shortcomings 
of  the  general  property  tax  were  five  in  number :  inequality 
of  assessment,  failure  to  reach  personalty,  incentive  to  dis- 
honesty, regressivity  and  double  taxation.  With  few  excep- 
tions, these  objections  are  as  applicable  to  the  taxation  of 
corporations  as  to  that  of  individuals.  All  the  facts  here 
to  be  recounted  set  the  stamp  of  disapproval  upon  the 
original  plan.  In  the  words  of  a  celebrated  report  on  taxa- 
tion, this  method  of  assessing  corporations  locally  on  their 
general  property,  is  "as  a  system,  open  to  almost  every 
conceivable  objection."2 

II.    Development  of  the  Corporation  Tax. 

As  a  result  of  these  practical  defects  many  commonwealths3 
have  abandoned  in  part,  or  altogether,  the  taxation  of  corpo- 
rate property  by  local  officials.  The  movement  away  from 
their  original  position  has  taken  three  directions :  (1)  the 
property  of  transportation  companies,  especially  railroads, 
has  been  assessed  separately  by  a  special  board  and  accord- 
ing to  well-defined  rules ;  (2)  certain  classes  of  corporations, 
beginning  with  banks  and  insurance  companies,  but  gradu- 
ally including  transportation  companies  and  in  a  few  cases 
other  corporations,  have  been  taxed,  not  on  their  property, 
but  on  certain  elements  supposed  to  represent  roughly  their 
taxable  capacity;  (3)  all  corporations  have  been  taxed  by  a 
uniform  rule,  according  to  principles  varying  more  or  less  in 
the  different  commonwealths. 

1  Alabama,  Colorado,  Florida,  Iowa,  Mississippi,  Nevada,  Ohio  and  South 
Carolina. 

2  Taxation  of  Railroads  and  Railroad  Securities.    By  C.  F.  Adams,  Jr., 
W.  B.  Williams  and  J.  H.  Oberly,  a  Committee  appointed  at  a  Convention 
of  State  Railroad  Commissioners,  etc.     (1880),  p.  8. 

8  The  word  commonwealth  is  here  used  to  include  the  territories  as  well 
as  the  states. 


142  ESS  Ays  IN  TAXATION 

The  first  tendency  has  progressed  so  far  that  only  nine 
commonwealths1  apply  the  primitive  methods  of  the  property 
tax  to  railroads.  In  these  states,  located  with  a  single  excep- 
tion in  the  South  and  in  the  far  West,  the  regular  local 
assessors  still  include  railroad  property  in  the  county  assess- 
ment. Twenty-four  commonwealths2  have  broken  away 
from  the  original  custom  so  far  as  to  have  the  railroad 
property  assessed  for  state  purposes  not  by  local  officials 
but  by  a  special  board.3  The  tax,  it  is  true,  is  imposed 
at  the  usual  rate  of  the  general  property  tax  ;  but  some 
of  the  difficulties  of  local  assessments  of  such  property 
have  been  obviated.  In  a  few  of  these  cases,  like  Cali- 
fornia, Colorado,  Idaho,  Indiana,  Kansas  and  Missouri,  the 
state  boards  assess  the  greater  part  of  the  property,  like  road- 
bed and  rolling  stock,  but  leave  the  remainder  to  be  appraised 
by  the  local  assessors.  In  most  instances  special  rules  are 
provided  for  the  assessment  of  the  track  and  rolling  stock  of 
roads  that  lie  partly  without  the  state,  generally  in  the  pro- 
portion which  the  state  mileage  bears  to  the  whole  mileage. 

For  reasons  to  be  discussed  later,  this  first  reform  of  rail- 
road taxation  has  not  been  completely  satisfactory.  The 
remaining  fifteen4  commonwealths,  including  most  of  the 

1  Louisiana,  New  Mexico,  Oklahoma,  Oregon,  Rhode  Island,  Tennessee, 
Texas,  Utah  and  Washington. 

2  Alabama,  Arizona,  Arkansas,  California,  Colorado,  Florida,  Idaho,  Illi- 
nois, Indiana,  Iowa,  Kansas,   Kentucky,  Mississippi,   Missouri,   Montana, 
Nebraska,   Nevada,  New  Hampshire,   North   Carolina    (as  an  alternative 
method),  Ohio,  South  Carolina,  South  Dakota,  Virginia  and  West  Virginia. 
In  North  Carolina,  if  the  road  is  not  taxed  on  its  property  it  pays  on  gross 
receipts.    In  Kentucky  and  Mississippi  there  are  additional  taxes. 

8  This  is  known  as  the  board  of  railroad  commissioners  in  Arkansas, 
board  of  railroad  assessors  in  Kansas,  board  of  assessment  for  railroads  in 
Alabama,  board  of  appraisers  and  assessors  in  North  Carolina,  board  of  pub- 
lic works  in  Virginia  and  West  Virginia,  state  executive  council  in  Iowa, 
board  of  railroad  commissioners  in  Kentucky  and  Mississippi,  state  board  of 
tax  commissioners  in  Indiana,  and  board  of  equalization  in  all  the  remaining 
cases  except  Florida,  where  the  comptroller,  attorney-general  and  treasurer 
act  ex  officio  as  assessors. 

4  Connecticut,  Delaware,  Georgia,  Maine,  Maryland,  Massachusetts,  Michi- 
gan, Minnesota,  New  Jersey,  New  York,  North  Carolina,  North  Dakota, 
Pennsylvania,  Vermont  and  Wisconsin. 


THE  TAXATION  OF  CORPORATIONS  143 

prosperous  and  progressive  states,  have  therefore  abandoned 
property  as  the  basis  of  taxation,  without  reference  to  the 
manner  of  assessment.  The  methods  adopted  by  them  are 
comprised  in  the  second  of  the  three  tendencies. 

This  second  movement  away  from  the  property  tax  has 
consisted  in  subjecting  particular  classes  of  corporations  to 
special  taxes  on  other  elements  than  their  general  property. 
It  will  be  well  to  discuss  these  classes  in  order. 

1.    Banks. 

The  direct  taxation  of  banks  dates  back  to  the  beginning 
of  this  century.  During  the  war  with  England  the  federal 
government  imposed  certain  stamp  duties  on  notes  issued  or 
discounted  by  banks.  But  this  law  of  1813  contained  a 
further  provision  permitting  the  banks  to  compound  for  the 
duty  by  paying  one  and  a  half  per  cent  on  the  amount  of 
the  annual  dividends. 

The  first  state  law  providing  for  a  direct  tax  on  banks 
was  the  Georgia  act  of  1805,  which  levied  a  tax  of  two 
and  a  half  per  cent  on  their  capital  stock  and  one-half  of  one 
per  cent  on  their  circulation.  Massachusetts  followed  with 
the  act  of  1812  which  imposed  a  tax  of  one-half  of  one  per 
cent  on  the  amount  of  their  capital  stock.  A  more  important 
law  was  the  Pennsylvania  act  of  1814,  for  Pennsylvania  from 
the  very  outset  assumed  an  attitude  different  from  that  of 
the  other  states.  According  to  this  law,  banks  were 
taxed  at  the  rate  of  six  per  cent  upon  their  dividends 
or  net  profits  ;  if  exempted  from  the  national  tax,  the  rate 
was  to  be  eight  per  cent.  In  1824  the  rate  was  definitely 
fixed  at  eight  per  cent,  and  a  few  years  later  the  principle 
of  graduated  taxation  was  introduced.  The  act  of  1834 
imposed  on  banks  of  issue  a  tax  on  dividends,  which  varied 
from  eight  to  eleven  per  cent  as  the  dividends  were  under 
six  or  over  eight  per  cent,  and  in  1859  the  law  was  extended 
to  banks  of  discount  and  deposit.  In  1861  this  progressive 
tax  was  increased  so  as  to  vary  from  eight  per  cent  if  the 


144  ESSAYS  IN  TAXATION 

dividends  were  six  per  cent,  up  to  thirty  if  the  dividends 
were  twenty-five.  Five  years  later,  the  tax  was  replaced  by 
the  system  to  be  explained  below. 

Ohio  and  Virginia  were  the  only  other  states  which  began 
and  for  some  time  continued  to  tax  banks  on  dividends, 
although  several  states,  like  Vermont,  in  chartering  special 
banks  sometimes  inserted  a  provision  in  the  charter,  reserv- 
ing a  portion  of  the  profits  or  dividends.  In  Ohio  a  tax  of 
four  per  cent  on  dividends  was  imposed  in  1815,  but  in 
1816  the  general  banking  law  obliged  the  banks  to  set  aside 
profits  which  at  the  expiration  of  the  charter  would  amount 
to  four  per  cent  of  the  total  stock.  In  1825  this  charge  was 
commuted  into  a  tax  of  from  two  to  four  per  cent  on  divi- 
dends, and  in  1831  the  rate  was  raised  to  five  per  cent.  In 
1845  banks  were  required  to  pay,  in  lieu  of  the  tax  on  divi- 
dends, six  per  cent  on  the  profits,  deducting  expenses  and 
ascertained  losses.  Five  years  later  the  taxation  of  profits 
or  dividends  was  abolished,  and  the  banks  were  henceforth 
taxed  at  the  rate  of  the  general  property  tax  on  the  amount 
of  their  capital  stock  and  contingent  fund.  In  Virginia 
the  dividends  tax  did  not  begin  until  1846,  when  the  banks 
were  required  to  pay  one  and  a  quarter  per  cent  on  dividends. 
This  rate  was  gradually  changed  until  during  the  Civil  War 
it  reached  seventeen  per  cent.  In  1870  a  new  system  was 
introduced,  based  partly  on  capital  stock,  partly  on  income 
or  dividends  above  $1500;  but  in  the  following  year  the 
present  method  was  adopted. 

While  Pennsylvania  and  Virginia  were  the  only  common- 
wealths to  retain  dividends  as  the  basis  of  taxation,  a  few 
states  taxed  banks  on  their  capital  stock.  Thus  the  Massa- 
chusetts tax  of  1812,  changed  in  1828  to  a  tax  of  one  per 
cent  on  the  amount  of  the  capital  stock  actually  paid  in, 
remained  in  force  practically  without  change  until  the 
Civil  War,  when  the  state  banks  were  superseded  by  the 
national  banks.  This  tax  was  in  addition  to  that  levied 
on  the  individual  stockholders,  but,  curiously  enough,  it 
applied  only  to  the  chartered,  not  to  the  free  banks. 


THE  TAXATION  OF  CORPORATIONS  145 

In  Louisiana  a  tax  was  imposed  in  1813  on  the  "stock 
in  trade "  of  all  banks.  In  other  states,  again,  a  special 
tax  was  levied  only  on  the  proportion  of  the  capital  stock 
owned  by  non-residents,  as  in  the  first  Connecticut  law 
of  1830,  which  imposed  a  tax  of  one-third  of  one  per  cent. 
In  most  of  the  commonwealths,  however,  the  special  state 
taxation  of  capital  stock  came  much  later,  since  the  prin- 
ciple of  the  property  tax  prevailed.  When  the  capital 
stock  was  taxed  at  all,  it  was  simply  as  representing  the 
personal  property,  and  hence  it  was  taxable  locally  at  the 
general  rate  of  the  property  tax.  The  real  estate  was  taxed 
separately,  as  in  New  York,  where  the  personal  property 
tax  was  levied  on  bank  stock  and  was  payable  by  the  cor- 
poration. According  to  the  law  of  1823,  discussed  above, 
the  tax  was  assessed  on  the  par  value  of  the  stock,  but 
in  1847  the  basis  was  changed  to  the  actual  market  value 
of  the  stock,  without  deduction  for  debts.  It  is  worthy 
of  note  that  in  North  Carolina,  where  the  taxation  of  capi- 
tal stock  did  not  come  until  1859,  the  rate  of  the  tax  varied 
with  the  dividends. 

Since  the  inception  of  the  national  banking  system  most 
of  the  commonwealths  have  again  changed  their  methods 
of  taxing  banks.  The  history  of  this  change  can  be  well 
traced  in  the  legislation  of  New  York.  According  to  the 
laws  mentioned  above,  banks  were  taxable  on  so  much  of 
their  capital  stock  as  represented  their  personal  property. 
Under  these  acts  the  banks  claimed  exemption  for  that  part 
of  their  capital  invested  in  United  States  bonds,  but  their 
claim  was  disallowed  by  the  court  of  appeals,  on  the  ground 
that  no  unfriendly  discrimination  was  thereby  shown  to  the 
United  States  as  a  borrower.  In  1862,  however,  the  national 
government  provided  by  law  for  the  total  exemption  from 
state  taxation  of  all  stocks,  bonds  and  other  securities  of  the 
United  States.  The  court  of  appeals  then  held  that  this 
provision  applied  only  to  stock  and  bonds  issued  after 
the  date  of  the  law,  but  that  all  securities  issued  prior 
thereto  were  still  taxable  according  to  the  state  statute. 


146  ESSAYS  IN  TAXATION 

This  decision  was  reversed  by  the  federal  Supreme  Court, 
which  held  that  any  "  stock  of  the  United  States  constituting 
a  part  or  the  whole  of  the  capital  stock  of  the  bank  is  not  sub- 
ject to  state  taxation."  The  legislature  then  sought  to  evade 
this  decision  by  enacting  that  banks  should  be  taxable  "  on  a 
valuation  equal  to  the  amount  of  their  capital  stock,"  with 
similar  deductions  and  exemptions  as  in  the  law  of  1857; 
and  the  court  of  appeals  pronounced  this  law  valid,  on  the 
ground  that  the  tax  was  on  capital  stock  and  not  on  prop- 
erty. This  decision  was  in  turn  reversed  by  the  Supreme 
Court,  which  held  the  tax  to  be  levied  on  the  property  of 
the  bank,  and  therefore  subject  to  deduction  for  non-taxa- 
ble investments.  In  1864  the  national  banking  act  was 
passed,  which  permitted  the  taxation  of  national  bank  shares 
in  the  hands  of  individuals,  but  not  at  a  greater  rate  than 
other  moneyed  capital.  This  gave  the  New  York  legisla- 
ture the  desired  opportunity,  and  in  1865  it  enacted  a  law 
providing  that  all  shares  in  national  banks  should  be  in- 
cluded in  the  valuation  of  the  personal  property  of  indi- 
viduals. The  court  of  appeals  held  this  to  be  valid.  It 
must  be  remembered,  however,  that  the  state  banks  were 
still  taxed  on  their  capital.  The  Supreme  Court  of  the 
United  States  now  upheld  the  principle  of  the  taxability  of 
shares,  on  the  ground  that  a  tax  on  the  shares  in  the  hands 
of  individuals  was  not  a  tax  on  the  capital  of  the  bank. 
Nevertheless  it  reversed  the  New  York  decision  on  a  minor 
point,  namely,  that  since  the  capital  of  state  banks  invested 
in  national  securities  was  exempt,  a  tax  on  the  capital  was 
not  equivalent  to  a  tax  on  the  shareholders,  and  hence  to  tax 
state  banks  on  their  capital  and  shareholders  of  national 
banks  on  their  shares,  constituted  a  discrimination  against 
national  banks.  This  decision  led  to  the  New  York  law 
of  1866,  which  abolished  the  taxation  of  bank  capital  and 
provided  for  the  taxation  of  shareholders  of  both  state  and 
national  banks  in  the  same  way,  i.e.,  on  the  value  of  the 
shares,  with  deductions  for  the  capital  invested  in  real 
estate.  The  banks  were  no  longer  taxed  on  their  capital, 


THE  TAXATION  OF  CORPORATION'S  147 

but  were  required  to  retain  the  dividends  from  the  stock- 
holders until  the  tax  was  paid.  The  Supreme  Court  sus- 
tained this  law,  holding  that  no  deduction  should  be  made 
from  the  value  of  the  shares  for  any  part  of  the  bank's 
capital  which  might  consist  of  United  States  bonds.  Later 
it  decided  the  state  tax  on  shares  to  be  valid,  even  if  it  were 
collected  from  the  banks.  The  question  then  arose  whether 
it  was  competent  for  the  shareholder  to  deduct  the  value 
of  his  debts,  as  was  the  case  in  the  taxation  of  all  other 
personal  property.  The  court  of  appeals  decided  in  1867 
in  the  negative,  holding  that  there  could  be  no  deduc- 
tion of  debts  from  the  assessment  of  bank  shareholders. 
This  case  slumbered  for  thirteen  years  ;  but  in  1880  a  deci- 
sion involving  this  precise  question  was  reversed  by  the  United 
States  Supreme  Court  on  the  ground  that  "the  prohibition 
against  the  taxation  of  national  bank  shares  at  a  greater  rate 
than  that  imposed  upon  other  moneyed  capital  could  not  be 
evaded  by  the  assessment  of  equal  rates  of  taxation  upon  un- 
equal valuations."  The  consequence  was  an  alteration  in  the 
New  York  law,  which  now  since  1880  permits  the  same  deduc- 
tions as  in  all  other  taxable  property  and  which  provides  for 
the  assessment  of  shares,  whether  owned  by  residents  or  non- 
residents, at  the  place  where  the  bank  is  located. 

The  result  of  this  development  is  that  bank  shareholders 
pay  a  large  proportion,  and  in  some  towns  the  greater  part,1 
of  all  the  taxes  on  personal  property,  and  that  they  alone  are 
unable  to  evade  the  otherwise  so  laxly  executed  tax  on  per- 
sonalty. The  most  recent  attempt  of  the  banks  to  remedy 
this  obvious  inequality  has  been  frustrated  by  a  decision  of 
the  Supreme  Court  that  the  words  "moneyed  capital,"  in 
the  revised  statutes,  are  practically  confined  to  banks,  and 
that  the  imposition  of  a  lower  rate  of  taxation  on  other  cor- 
porations does  not  invalidate  the  bank  tax.2  I  do  not  of 

1  In  Albany  the  banks  paid  fifty-eight  per  cent  of  all  taxes  on  personalty. 
New  York  State  Assessors'  Report,  1878,  p.  16. 

2  The  cases  in  their  order  are  as  follows :  23  N.  Y.  192  ;  26  N.  Y.  163  ;  2 
Black  870 ;  2  Wall.  200  ;  33  N.  Y.  161 ;  3  Wall.  573 ;  4  Wall.  244 ;  9  Wall. 
353  ;  36  N.  Y.  59  ;  100  U.  S.  539  ;  129  U.  S.  138. 


148  ESS AyS  IN  TAXATION 

course  mean  to  plead  that  the  banks  should  be  treated  ten- 
derly or  that  they  should  be  supported  in  their  attempts 
to  evade  taxation  ;  but  it  is  a  manifest  incongruity  that 
bank  shareholders  almost  alone  among  owners  of  personalty 
should  be  taxed.  That  they  should  be  singled  out  for  what 
is  actually  heavier  taxation,  is  one  of  the  unjust  conse- 
quences of  the  general  property  tax.  The  only  inference  is 
the  necessity  of  a  comprehensive  reform. 

This  system  of  taxing  banks,  whose  development  has  just 
been  sketched  for  the  state  of  New  York,  is  now  general 
throughout  the  country,  at  least  in  those  commonwealths 
which  do  not  still  cling  to  the  method  of  the  general  prop- 
erty tax  as  applied  to  corporations.  It  may  be  summed  up 
as  the  separate  taxation  of  real  estate  plus  the  taxation  of 
the  shares  in  the  hands  of  individuals,  whose  tax  is  generally 
paid  by  the  bank  and  then  withheld  from  the  dividends. 
Some  commonwealths  have  enacted  more  detailed  provisions 
to  avoid  the  confusion  arising  from  the  taxation  of  non-resi- 
dents' stock.  The  Massachusetts  law,  for  example,  which 
dates  back  to  1868,  provides  that  the  assessors  of  a  town 
where  a  national  bank  is  located  shall  omit  from  the  town 
valuation  all  shares  held  by  non-residents,  and  that  the  taxes 
paid  by  the  bank  on  these  shares  shall  be  credited  to  the 
places  where  the  owners  reside.  In  Connecticut  the  shares 
of  non-residents  are  not  taxed  at  the  usual  rate,  but  the 
banks  themselves  pay  one  per  cent  on  the  market  value  of 
such  shares  as  a  "non-resident  stock  tax." 

A  few  commonwealths  still  tax  banks  directly  on  their 
capital  stock  at  a  special  rate.  In  Pennsylvania,  for  example, 
the  shares  pay  four  mills  on  the  dollar,  but  incorporated 
banks  may  elect,  as  all  do,  to  pay  instead  eight  mills  on  the 
par  value  of  their  capital  stock.  They  are  then  liable 
only  for  the  local  real  estate  tax  and  for  the  state  tax  on 
their  moneys  at  interest.  A  three  per  cent  net  earnings  or 
income  tax  applies  only  to  the  unincorporated  banks  with- 
out capital  stock.  In  Kentucky,  where  the  banks  are 
taxed  on  capital  and  surplus,  they  waive  all  rights  to  a 


THE  TAXATION-  OF  CORPORATION'S  149 

different  mode  or  smaller  rate  of  taxation.  In  a  few  cases, 
however,  we  find  a  mixed  system.  Thus  in  Georgia  banks 
are  taxed  not  on  their  capital,  but  on  their  property,  so  far 
as  the  value  of  the  property  is  not  represented  in  the  market 
value  of  the  shares.  The  shares  are  then  taxable  in  the 
hands  of  the  shareholders  and  the  bank  itself  is  further  tax- 
able on  its  surplus  and  undivided  profits.  Finally,  in  some 
of  the  Southern  commonwealths,  as  North  Carolina  and 
Florida,  we  find  in  addition  to  a  tax  on  bank  shares  a  license 
tax  fixed  according  to  capital  or  to  business  transacted. 
New  York  has  a  special  law  taxing  foreign  banks  at  the  rate 
of  one-half  of  one  per  cent  on  their  deposits  or  moneys  used 
in  their  business. 

There  remains  the  subject  of  savings  banks.  When  they 
are  not  incorporated  stock  companies,  several  states,  including 
all  New  England,  tax  them  on  their  deposits,  at  rates  ranging 
from  one-quarter  to  one  per  cent.  In  Massachusetts,  where, 
up  to  that  time,  the  deposits  had  been  nominally  taxable 
as  the  personal  property  of  the  individual  depositors,  the  new 
system  came  into  use  in  1862  ;  in  Vermont,  not  until  1878 ; 
in  the  rest  of  New  England,  in  the  interval.  In  Massachu- 
setts, however,  deposits  invested  in  real  estate  or  mortgages 
on  real  estate  are  exempt.  In  Maine  the  tax  since  1893  is 
on  deposits,  reserve  fund  and  undivided  profits,  less  certain 
deductions.1  In  other  cases,  as  in  New  York,  deposits  are 
expressly  exempted  from  taxation,  but  savings  banks  are 
then  taxed  for  local  purposes  on  their  surplus  not  invested 
in  United  States  securities,  and  the  individual  depositors  are 
taxable  on  their  deposits  as  property.  In  Pennsylvania 

1  The  deposits,  reserve  fund  and  undivided  profits  are  added  together. 
Deductions  are  allowed  for  the  amount  invested  in  federal  bonds  ;  for  the  as- 
sessed value  of  the  real  estate ;  for  one-seventh  of  other  assets,  loans  and 
investments  acquired  before  1893  ;  for  two-sevenths  of  loans  to  persons  doing 
business  in  the  state,  of  investments  in  mortgages  in  New  Hampshire  and 
Maine,  of  securities  of  the  state,  of  bonds  issued  or  guaranteed  by  corpora- 
tions located  and  doing  business  in  the  state,  of  the  cash  on  hand  and  of  cash 
deposits  in  the  state.  The  remainder  is  declared  to  be  the  value  of  the  fran- 
chise, which  is  then  taxed  at  the  rate  of  seven-eighths  of  one  per  cent. 


150  ESS AyS  Iff  TAXATION 

savings  banks  are  taxed  in  the  same  way  as  other  banks,  — 
that  is,  if  they  are  neither  incorporated  nor  possessed  of  any 
capital  stock,  they  pay  four  per  cent  on  their  net  earnings  or 
income ;  otherwise  they  pay  eight  mills  on  the  par  value  of 
their  stock.  In  most  of  the  remaining  commonwealths 
there  is  no  special  taxation  of  savings  banks,  unless  they 
are  incorporated.  If  incorporated  in  Iowa  and  Ohio  they 
pay  the  usual  property  tax  on  their  paid-up  capital,  but 
their  deposits  and  franchises  are  expressly  exempt.  The 
depositors,  however,  are  taxed. 

In  the  matter  of  bank  taxation,  therefore,  we  are  begin- 
ning to  reach  uniformity  except  in  the  case  of  savings  banks. 
But  the  uniformity,  so  far  as  its  exists,  has  been  imposed 
upon  the  states  by  the  national  law.  Even  this  approach 
to  a  solution  of  the  problem,  moreover,  as  will  appear  later 
on,  has  not  been  entirely  satisfactory. 


2.    Insurance  Companies. 

The  next  corporations  to  break  away  from  the  general 
property  tax  were  the  insurance  companies.  At  first  only 
foreign  companies1  were  taxed.  The  earliest  law  was  that 
of  1824  in  New  York,  which  provided  that  foreign  fire  in- 
surance companies  should  pay  ten  per  cent  on  all  premiums 
for  property  insured  within  the  state.  In  1829  the  law 
was  extended  to  foreign  marine  insurance  companies,  and 
in  1837  the  rate  was  reduced  to  two  per  cent.  Domestic 
companies  were  taxable  on  their  capital  stock,  like  all 
other  corporations,  according  to  the  general  law  of  1828. 
Ohio  started  out  by  taxing  insurance  companies  as  well 
as  banks,  assessing  them  in  1830  four  per  cent  on  their 
dividends.  But  this  form  of  taxation  was  soon  aban- 

1  The  use  of  the  term  foreign  corporations  in  the  American  statutes  is 
confusing.  Generally  it  designates  companies  incorporated  in  another  of 
the  American  commonwealths.  In  only  a  few  cases  does  it  refer  to  non- 
American  states.  In  these  chapters  it  will  be  used  in  the  former  sense  unless 
otherwise  indicated. 


THE  TAXATION  OF  CORPORATION'S  151 

doned.  In  Pennsylvania,  where  domestic  companies  were 
included  in  the  general  law  of  1840,  foreign  insurance  com- 
panies were  not  specially  taxed  until  1849,  when  the  law 
imposed  a  tax  of  one  per  cent  on  the  gross  premiums  of 
foreign  life  insurance  companies.  In  Maryland  the  custom 
dates  from  1839,  when  a  tax  of  two  per  cent  was  imposed  on 
the  premiums  received  by  the  agents  of  foreign  insurance  com- 
panies. In  Vermont  foreign  fire  insurance  companies  were 
taxed  eight  per  cent  on  their  premiums  in  1825  ;  but  the 
law  was  repealed  five  years  later.  In  Massachusetts  the  tax 
was  first  levied  by  the  law  of  1832,  which  is  of  special  interest 
as  the  prototype  of  what  is  known  in  several  of  our  common- 
wealths to-day  as  the  "reciprocal  acts."  The  act  provided 
that  if  any  commonwealth  taxed  the  agents  of  Massachusetts 
insurance  companies,  the  insurance  companies  of  such  com- 
monwealth were  to  pay  one-half  of  one  per  cent  on  the  whole 
amount  insured  by  such  companies  in  Massachusetts.  At 
present  the  reciprocal  acts  go  somewhat  further  and  prescribe 
that  foreign  insurance  companies  are  to  be  taxed  at  the  same 
rate  (if  higher  than  the  home  rate)  that  is  imposed  on  home 
insurance  companies  by  the  commonwealth  chartering  the 
foreign  company;  but  if  the  tax  imposed  by  the  foreign 
commonwealth  is  not  higher,  the  foreign  companies  pay  as  a 
rule  two  per  cent  on  premiums.  Such  reciprocal  acts  are 
found  in  Connecticut,  Illinois,  Kansas,  Maine,  Massachusetts, 
New  York,  Ohio  and  Vermont.  The  Kansas  court  calls  them 
"  an  appeal  for  comity,"  "  a  demand  for  equality  ; " l  but  in 
reality  they  are  retaliatory,  rather  than  reciprocity,  laws.2 

This  premium  tax  on  foreign  companies  was  gradually  ex- 
tended to  domestic  companies,  until  at  present  it  is  found 
in  almost  every  commonwealth,  only  a  few  of  the  Western 
states  clinging  to  the  original  custom  of  taxing  them  on 
their  property.  Occasionally  the  tax  is  known  as  an  insur- 
ance license  or  an  insurance  fee.  In  some  of  the  Southern 

1  Cf.  29  Kan.  672. 

2  Alabama  declared  them  unconstitutional  for  this  reason ;  60  Ala.  217. 
In  the  other  states  they  have  been  upheld. 


152  ESSAYS  IN  TAXATION 

states,  like  North  Carolina,  the  companies  must  pay  both  fees 
and  taxes.  In  a  few  cases,  as  in  Alabama,  Connecticut, 
Indiana,  Missouri  and  West  Virginia,  the  principle  of  tax- 
ing premiums  has  been  applied  only  to  foreign  companies, 
while  home  companies  are  still  taxed  on  their  property, 
assets  or  surplus.  Many  commonwealths  make  a  further 
distinction  between  domestic  and  foreign  companies,  taxing 
the  latter  more  than  the  former.  Thus  Kentucky,  Maryland 
and  Ohio  tax  the  gross  receipts  of  foreign  companies  only. 
In  Pennsylvania  domestic  insurance  companies  (except  mu- 
tual companies)  pay  eight-tenths  of  one  per  cent,  and  foreign 
companies  two  per  cent  on  premiums.  Delaware  imposes  a 
small  license  on  domestic  companies,  but  levies  a  gross 
receipts  tax  on  foreign  companies.  In  Minnesota  foreign 
companies  pay  the  property  tax  plus  a  two  per  cent  pre- 
miums tax ;  but  domestic  companies  pay  only  a  real  estate 
tax  plus  the  premiums  tax,  while  domestic  mutual  life 
companies  pay  no  premiums  tax  at  all.  In  New  Jersey 
insurance  companies,  other  than  life,  are  taxed  one  per  cent 
on  premiums,  while  domestic  life  insurance  companies  pay 
one  per  cent  on  their  surplus  plus  thirty-five  one-hundredths 
of  one  per  cent  on  premiums ;  but  the  payments  from  the 
foreign  companies  are  credited  to  the  domestic  companies. 
In  New  York  domestic  life  insurance  companies  are  exempted 
from  taxation,  but  foreign  companies  pay  two  per  cent  on 
premiums  ;  and  while  all  fire  and  marine  insurance  companies 
pay  the  same  tax  for  state  purposes,  the  foreign  companies 
alone  pay  an  additional  local  tax. 

Although  the  premiums  tax  is  the  general  tax,  we  find 
some  instances  where  taxes  are  based  on  different  elements. 
Some  of  the  Southern  and  a  few  of  the  Western  states,  like 
Mississippi  and  Idaho,  impose  license  or  privilege  taxes  of  a 
fixed  amount.  In  Louisiana  the  gross  receipts  tax  is  gradu- 
ated. Other  states  combine  various  taxes.  Thus  we  find 
in  Virginia  the  general  property  tax  on  a  company's  realty 
and  personalty,  a  specific  tax  of  $200,  and  an  additional  tax 
of  one  per  cent  on  gross  receipts  in  the  state.  Massachusetts 


THE  TAXATION  OF  CORPORATIONS  153 

imposes  on  life  insurance  companies  a  tax  of  five  mills  on 
each  thousand  dollars  insured,  as  compensation  for  the  state 
valuation  of  policies,  and  a  "license  tax"  of  one-fourth  of 
one  per  cent  on  the  net  value  of  all  policies.  Other  insurance 
companies  pay  an  excise  tax  of  one  per  cent  on  premiums 
and  assessments ;  but  non- American  companies  pay  four  per 
cent  on  premiums  (or  two  per  cent  if  there  is  a  guarantee  fund 
of  $200,000).  Finally,  a  special  life  insurance  company  is 
taxed  on  its  funds,  deducting  deposits  invested  in  mortgages.1 
New  Hampshire  taxes  domestic  fire  insurance  companies 
one  per  cent  on  paid-up  capital,  in  lieu  of  all  other  taxes. 
Wherever  the  reciprocal  law  exists,  as  in  Connecticut  and 
Massachusetts,  there  is  a  highly  diversified  system  of  insur- 
ance taxation. 

The  tax  on  premiums  is  generally  levied  on  gross  premiums 
or  on  gross  receipts.  Sometimes,  as  in  Arkansas,  Illinois, 
Maine,  Missouri,  Nebraska  and  Washington,  the  tax  is  on 
net  receipts.  But  in  Illinois,  Maine  and  Missouri  only 
foreign  companies  are  subject  to  this  tax.  In  Indiana  we 
formerly  found  the  seemingly  curious  distinction  that  home 
companies  were  taxed  on  net,  and  foreign  companies  on  gross 
receipts;  but  the  taxes  were  really  the  same,  because  ex- 
penditures, losses  paid  and  return-premiums  were  deducted. 
So  also  in  Alabama  the  tax,  while  nominally  on  gross, 
is  in  reality  on  net  receipts.  In  Indiana  domestic  com- 
panies are  now  taxed  on  their  property  and  franchise. 
In  Illinois  the  net  receipts  of  foreign  insurance  companies 
are  entered  as  personal  property  and  are  included  in  the 
general  property  tax ;  the  companies  are  then  free  of  all 
local  taxes,  except  for  the  benefit  of  fire  departments  in 
cities,  which  may  impose  a  tax  not  exceeding  ten  per  cent 
on  gross  receipts.  In  most  of  the  commonwealths  the  real 
estate  of  the  companies  is  also  taxable.  Even  when  the  state 
tax  on  premiums  or  on  other  elements  is  declared  to  be  in 
lieu  of  other  taxation,  as  in  Maine,  the  declaration  applies 

1  For  details  of  these  various  taxes,  see  my  monograph  on  Finance 
Statistics. 


154  ESSAYS  IW  TAXATION 

usually  only  to  state,  not  to  local,  taxation.  So  that  in- 
surance companies  are  almost  everywhere  subject  to  the 
ordinary  local  taxes. 

From  the  above  summary  it  appears  that  life  insurance 
companies,  especially  mutual  companies,  are  in  general 
treated  differently  from  other  insurance  companies.  The 
reasons  are  obvious  and  well  founded.  Yet  in  Texas  and 
Vermont  life  insurance  companies  are  taxed  more  heavily 
than  others. 

3.    Railroads. 

A  complete  history  of  the  development  of  railway  taxation 
would  occupy  an  entire  book ;  hence,  it  will  be  possible  here 
to  say  only  a  few  words  about  some  of  the  typical  common- 
wealths. 

In  Pennsylvania,  railroads  were  included  in  the  general 
tax  law  of  1840,  and  were  assessed  on  their  personalty  and 
on  their  dividends.  In  1844  the  tax  on  personalty  was 
abandoned,  but  the  general  corporation  tax  on  capital  and 
dividends  continued  with  some  modifications  for  over  two 
decades.  In  1860  a  special  tonnage  tax  was  levied  on  trans- 
portation companies  at  the  rate  of  two,  three  and  five  cents 
per  ton  of  freight  carried,  and  an  additional  tax  of  three- 
quarters  of  one  per  cent  was  laid  on  their  gross  receipts. 
The  former  was  declared  unconstitutional  by  the  federal 
courts,  and  as  a  result,  by  the  act  of  1874,  all  transportation 
companies  were  taxed  only  on  their  capital  stock,  at  the  rate 
of  nine-tenths  of  a  mill  for  each  one  per  cent  of  dividends, 
or  at  the  rate  of  six  mills  if  there  were  no  dividends.  In 
1879  the  dividends  and  earnings  taxes  were  slightly  changed, 
and  the  law  was  passed  which,  with  the  amendments  of  1885, 
1889  and  1891,  is  in  force  to-day.  In  New  York,  railroads 
were  subject  to  the  general  property  tax  until  1880,  when  a 
law  was  enacted  which  with  some  modifications  is  now  in 
force.  In  New  Jersey,  railroads  were  subject  to  the  general 
property  tax  until  1873,  when  a  tax  was  imposed  at  the  rate 


THE  TAXATION  OF  CORPORATIONS  155 

of  one-half  of  one  per  cent  on  their  cost,  equipment  and 
appendages.  Three  years  later  the  cost  tax  was  abandoned, 
and  a  tax  at  the  same  rate  was  imposed  on  the  true  value 
of  the  roads.  This  system  prevailed  until  1884,  when  the 
present  method  was  introduced. 

In  Connecticut,  the  law  requiring  certain  stock  companies 
to  make  returns  of  the  stock  owned  by  individuals  was 
extended  in  1846  to  railroads.  Three  years  later  every 
railroad  that  had  paid  a  dividend  in  the  preceding  year 
was  required  to  pay  one-half  of  one  per  cent  on  the  market 
value  of  the  shares  held  by  non-residents ;  but  if  the  rail- 
road was  partly  out  of  the  state,  the  tax  was  to  be  pro- 
portioned to  the  mileage  in  the  state.  This  system  worked 
so  well  that  in  1850  it  was  extended  to  resident  stock- 
holders, and  was  made  one-third  of  one  per  cent  in 
lieu  of  all  other  taxes.  In  1862  the  rate  was  increased, 
but  the  provision  was  inserted  that  the  stock  should  not 
be  assessed  at  less  than  ten  per  cent  of  the  par  value. 
In  1864  the  outlines  of  the  present  system  were  drawn  by 
requiring  the  companies  to  add  to  the  valuation  of  the  stock 
the  market  value  of  the  funded  and  floating  indebtedness 
less  the  cash  on  hand,  and  to  pay  one  per  cent  on  this  valua- 
tion in  proportion  to  the  mileage  in  the  state.  In  1871  it 
was  provided  that  if  the  railroad  paid  any  local  tax  this 
might  be  deducted  from  the  state  tax.  In  1881  a  deduction 
was  made  from  the  taxable  valuation  for  such  portion  of 
its  debt  as  was  contracted  for  stock  taken  in  other  roads. 
In  1882  the  funded  and  floating  debts  and  bonds  were  to 
be  valued  at  par  unless  the  market  value  was  below  par. 
And  in  1887  the  present  law,  with  substantially  the  same 
provisions,  was  enacted. 

After  this  hasty  glimpse  at  some  of  the  typical  forms  of 
development,  let  us  now  study  the  actually  existing  chaos. 
Chaos  we  say,  because  the  remark  of  the  railroad  tax  com- 
mittee of  1879  still  holds  good  to-day,  that  "there  is  no  method 
of  taxation  possible  to  be  devised  which  is  not  at  this  time 
applied  to  railroad  property  in  some  part  of  this  country. 


156  ESSAYS  IN  TAXATION 

A  more   discouraging  example  of  general   confusion  could 
hardly  be  imagined."1 

As  stated  above,  fifteen,  or  including  Mississippi,  sixteen 
commonwealths  have  abandoned  property  as  the  basis  of 
the  tax ;  and  of  these,  the  majority  now  assess  the  rail- 
roads on  earnings.  Nine  levy  a  tax  ranging  from  one- 
quarter  of  one  to  five  per  cent  on  gross  earnings  only.2 
Wisconsin,  however,  combines  in  some  cases  a  mileage 
tax  with  the  earnings  tax.  Washington  until  1888  also 
had  an  earnings  tax.  Three  commonwealths  —  Massachu- 
setts, New  York  and  Pennsylvania  —  include  railroads  in 
the  general  corporation  tax,  but  New  York  and  Penn- 
sylvania levy  an  additional  tax  on  gross  earnings  (one- 
half  and  eight-tenths  of  one  per  cent  respectively),  while 
Massachusetts  also  levies  a  commission  tax  on  gross  earn- 
ings in  proportion  to  mileage,  and  in  the  case  of  corpora- 
tions to  construct  railroads  in  foreign  countries  substitutes 
a  tax  of  one-twentieth  of  one  per  cent  on  capital  stock. 
Mississippi  taxes  railroads  at  a  fixed  sum  per  mile,  accord- 
ing to  the  reputed  wealth  or  earning  capacity  of  each 
road,  in  addition  to  the  property  which  is  declared  to 
include  the  value  of  the  franchise.  Delaware  levies  six 
separate  taxes,  viz.:  on  capital  stock  (one  per  cent),  net 
earnings  (ten  per  cent),  locomotives  ($100  each),  passenger 
cars  ($25),  freight  cars  ($10)  and  passengers  (ten  cents 
each) ;  but  the  companies  may  pay  a  gross  sum  in  commuta- 
tion of  the  passenger  tax.  In  New  Jersey,  the  law  directs 
the  board  of  assessors  to  ascertain  the  value  of  the  main 
stem,  of  the  other  real  estate  and  of  the  tangible  personalty. 
This  would  really  be  a  property  tax  were  it  not  that  the 
assessors  are  further  directed  to  ascertain  the  value  of  the 
franchise.  The  whole  question  of  corporate  franchise  will 
be  deferred  to  the  succeeding  chapter;  but  it  may  be  here 

1  Taxation  of  Railroads  and  Railroad  Securities,  p.  1. 

2  Georgia,  Maine,  Maryland,  Michigan,  Minnesota  (where  companies  may 
commute  in  this  way  for  the  property  tax),  North  Carolina,  North  Dakota, 
Vermont  and  Wisconsin. 


THE  TAXATION-  OF  CORPORATIONS  157 

stated  that  the  New  Jersey  assessors  have  endeavored  to 
estimate  the  franchise  by  taking  sometimes  an  arbitrary 
proportion  (sixty  per  cent)  of  the  surplus  of  the  value  of 
the  capital  stock  and  total  indebtedness  over  the  value  of 
the  tangible  property,  sometimes  a  percentage  (twenty  per 
cent)  of  the  gross  earnings.  The  railroads  must  pay  one- 
half  of  one  per  cent  on  this  entire  valuation,  both  property 
and  franchise,  for  state  purposes,  and  in  addition  they  pay 
to  the  state  a  tax  at  the  local  rate  on  the  value  of  their 
real  estate  in  each  taxing  district  outside  of  the  main  stem. 
This  portion  of  the  tax,  however,  which  is  really  a  prop- 
erty tax,  cannot  exceed  one  per  cent  of  the  value,  and  is 
returned  by  the  state  to  the  taxing  district. 

In  Connecticut,  railroads  are  required  to  pay  a  tax  of 
one  per  cent  on  the  valuation  of  their  capital  stock  and  on 
the  par  value  (or  on  the  market  value,  if  below  par)  of  their 
funded  and  floating  debt  above  the  amount  in  the  sinking 
fund.  If  only  part  of  a  railway  is  in  the  state,  the  company 
pays  on  such  proportion  of  the  above  valuation  as  the  mile- 
age in  the  state  bears  to  the  total  mileage,  omitting  the 
value  and  length  of  such  branch  lines  as  are  of  less  than 
one-quarter  the  average  mileage  value  of  the  trunk  line. 
The  alternative  law  of  Vermont  is  very  much  the  same. 
The  old  law  taxing  railroads  on  their  gross  receipts  was 
declared  unconstitutional.  The  new  law  of  1890  taxes 
them  seven-tenths  of  one  per  cent  on  an  appraised  valu- 
ation equal  to  the  market  value  of  the  bonds  and  stock, 
consideration  being  taken  in  each  case  of  the  value  of  the 
corporate  franchise.  The  appraisement  is  made  partly  on 
gross,  partly  on  net  earnings.  If  the  railroad  does  an  in- 
terstate business,  the  total  valuation  is  divided  by  the  num- 
ber of  miles  of  the  main  line  to  get  the  average  value  per 
mile,  and  this  is  then  multiplied  by  the  mileage  within  the 
state. 

Among  the  commonwealths  which  assess  railroads  on 
their  gross  earnings,  five  grade  the  tax  according  to  the 
age  of  the  road  or  to  the  amount  of  the  earnings.  The 


158  ESSAYS  IN  TAXATION 

former  Vermont   tax  was   also   graduated.     The  rates  are 
as  follows  :  — 

Maine  (excise  tax):  Earnings  of  $1500  per  mile  and  under,  \  of  1%; 

thence  increasing  by  \  of  1%  for  every  $750  up  to  the  maximum 

of  3J%. 
Michigan  (specific  tax)  :  For  the  first  $2000  per  mile,  2%;  from  $2000  to 

$4000,  2£%;  from  $4000  to  $6000,  3%;  from  $6000  to  $8000,  3J%; 

over  $8000,  4%. 

Minnesota:  First  three  years,  1%;  next  seven  years,  2%;  afterwards,  3%. 
North  Dakota :  First  five  years  of  operation,  3% ;  afterwards,  2%. 
Wisconsin  (license  fees) :  Less  than  $1500  per  mile,  $5  per  mile ;  $1500 

to  $3000,  the  same  plus  2%  on  the  excess  over  $1500;  $3000  and 

upward,  4%.     But  all  railroads  upon  pile  or  pontoon  bridges  are 

taxed  uniformly  2%. 

An  important  point  in  the  treatment  of  railroads  is  the 
extent  to  which  these  new  methods  of  state  taxation  have 
superseded  local  taxation.  In  North  Dakota  and  Minne- 
sota, the  special  railroad  tax  is  declared  to  be  in  lieu  of 
all  other  taxation,  state  or  local.  This  is  virtually,  though 
not  technically,  true  in  Connecticut ;  for  if  the  real  estate 
not  used  for  railroad  purposes  is  taxable  locally,  the  valu- 
ation on  which  the  state  tax  is  based  is  reduced  by  the 
amount  of  local  taxes.  It  was  also  true  of  Washington, 
when  it  had  a  gross  earnings  tax.  In  six  of  the  remaining 
cases  —  Delaware,  Maine,  Maryland,  Massachusetts,  Mis- 
sissippi and  New  York  —  the  local  bodies  may  also  tax  rail- 
road property,  but  with  some  restrictions.  In  Maine,  only 
the  buildings  of  the  railroad  and  the  lands  and  fixtures 
outside  the  located  right  of  way  are  taxable  locally.  In 
Massachusetts,  the  railroads  are  taxable  locally  only  on 
their  real  estate  (except  a  belt  of  land  adjoining  the  road- 
bed with  the  structures  connected  with  it)  and  machinery. 
But  as  the  value  of  this  property  is  deducted  from  the 
total  valuation  for  the  commonwealth  tax,  Massachusetts 
belongs,  strictly  speaking,  in  the  preceding  category.  In 
Mississippi,  only  cities  and  towns  have  the  privilege  of 
taxing  railroad  property  in  general,  but  all  local  divisions 
may  tax  that  part  which  is  not  used  for  railroad  pur- 


THE  TAXATION  OF  CORPORATIONS  159 

poses.  In  New  York,  under  the  general  corporation-tax  law, 
the  real  estate  of  railroads  is  taxable  for  state  purposes ;  and 
both  realty  and  personalty  are  taxable  for  local  purposes. 
But  only  the  value  of  the  realty  is  deducted  from  the  total 
valuation  of  the  stock  for  the  commonwealth  tax.  Finally, 
in  the  five  remaining  states  —  Michigan,  New  Jersey,  Penn- 
sylvania, Vermont  and  Wisconsin —  the  railroads  are  subject 
to  a  local  tax  only  on  that  part  of  their  property  not  used  for 
railroad  purposes.  In  New  Jersey,  this  local  tax  must  not  be 
confounded  with  the  "  tax  on  the  taxing  districts  "  described 
above,  which  is  in  reality  also  a  local  tax.  In  Pennsylvania, 
all  property  necessary  to  the  successful  operation  of  the  rail- 
road including  stations,  water  tanks,  etc.,  but  not  city  offices, 
has  been  held  to  be  a  part  of  the  franchise,  and  therefore  not 
locally  taxable.  In  Wisconsin  railroad  property,  even  though 
used  for  railroad  purposes,  may  be  assessed  in  cities  and  vil- 
lages, for  local  improvements  only. 

Besides  these  fifteen  commonwealths  which  have  broken 
away  from  the  old  property  tax,  four  states  which  retain 
this  as  the  main  feature  add  other  taxes  not  based  on  prop- 
erty. Thus,  in  Alabama  we  find  a  "license  tax"  on  gross 
earnings,  to  defray  the  salaries  of  the  commission  ;  in  North 
Carolina  a  privilege  tax  of  one-half  of  one  per  cent  on  gross 
receipts  (if  only  the  personal  property  is  taxed)  and  a  fran- 
chise tax,  at  the  general  rate  of  the  property  tax,  assessed 
on  the  value  of  the  franchise  as  estimated  by  the  board  of 
appraisers  ;  in  Texas  a  tax  of  one-quarter  of  one  per  cent  on 
gross  passenger  earnings ;  in  Virginia  a  tax  on  gross  earn- 
ings, to  pay  the  salaries  of  the  commission,  and  a  tax  of  one 
per  cent  on  net  income.  Again,  some  of  the  Southern  com- 
monwealths impose  special  licenses  on  the  railroads.  Finally, 
we  find  in  a  few  commonwealths,  like  Delaware,  Illinois, 
New  Jersey,  North  Carolina  and  Pennsylvania,  special  taxes 
levied  on  special  railroads. 

This  survey  will  suffice  for  a  picture  of  the  existing  chaos. 
The  theory  and  criticism  must  be  left  to  a  subsequent 
section. 


160  ESSAYS  IN  TAXATION 


4.    Other  Transportation  and  Transmission  Companies. 

The  taxation  of  telegraph  companies  has  undergone  an 
evolution  similar  to  that  of  railroads,  although  not  quite  so 
complicated.  In  the  majority  of  commonwealths,  telegraph 
property  is  included  by  the  local  assessor  in  the  general 
tax  list  and  pays  the  regular  rate  of  the  general  property 
tax.  In  a  few  cases,  as  in  Florida,  Iowa  and  Ohio,  it  is 
separately  assessed  by  special  officers,  but  still  pays  the 
general  rate.  In  a  few  other  cases  again,  as  in  Maine  and 
New  Hampshire,  telegraph  companies  pay  on  the  value  of 
their  property,  but  at  a  fixed  rate  which  remains  constant 
from  year  to  year.  In  twenty-one  commonwealths,  how- 
ever, telegraph  companies  pay  a  special  tax  based  not  on 
property  but  on  other  elements.  Here  again,  as  in  the  case 
of  other  corporations,  the  special  tax  is  in  some  states  appli- 
cable only  to  state  taxation,  while  the  local  tax  is  still  assessed 
on  the  general  property.  In  eleven  cases 1  the  system  of 
taxing  gross  receipts  prevails,  although  applicable  in  West 
Virginia  only  to  foreign  companies.  Six  commonwealths 
tax  the  companies  on  mileage,  the  rate  generally  decreasing 
with  each  additional  wire.2  Mississippi  imposes  a  privilege 
tax  of  $3000  ;  or  if  the  line  is  less  than  one  thousand  miles 
long,  makes  the  tax  one  dollar  per  mile.  Tennessee  grades 
the  tax  according  to  the  population  of  the  towns  ;  Virginia 
levies  a  property  tax,  a  one  per  cent  gross  earnings  tax,  and 
a  license  tax  of  $250  ;  Alabama,  a  privilege  tax  of  $500, 
together  with  a  tax  of  one  dollar  per  mile  of  line.  Indiana 
takes  as  a  basis  for  assessment  the  value  of  the  capital  stock 
plus  the  bonded  debt,  if  any,  deducting  the  assessed  value 
of  real  estate  situated  outside  the  state.  After  taking  from 
this  valuation  a  part,  proportionable  to  the  ratio  which  the 
mileage  in  the  state  bears  to  the  total  mileage,  the  board 

1  Georgia,  Louisiana,  Maryland,  New  Jersey,  New  York,  North  Carolina, 
Ohio,  Pennsylvania,  Rhode  Island,  Vermont  and  West  Virginia. 

2  Connecticut,  Delaware,  Florida,   Kentucky,  North  Dakota  and  Wis- 


THE  TAXATION  OF  CORPORATIONS  161 

deducts  the  real  estate  and  machinery  taxable  locally,  and 
divides  the  remainder  by  the  mileage  in  the  state.  The 
resulting  value  per  mile  is  then  taxed  at  the  usual  rate  of 
the  property  tax,  each  county  getting  its  share. 

The  tendency  seems  to  be  toward  the  mileage  tax  ;  for 
several  commonwealths,  like  Alabama  and  Connecticut,  which 
formerly  levied  a  gross  receipts  tax,  have  now  substituted 
the  tax  on  mileage.  In  Vermont  also  the  telegraph  com- 
panies may  elect  to  pay,  in  lieu  of  the  tax  on  gross  earnings, 
sixty  cents  per  mile  of  pole  and  one  line  of  wire,  plus  forty 
cents  per  mile  for  each  additional  wire.  On  the  other  hand 
Minnesota,  which  formerly  (since  1867)  levied  a  mileage 
tax,  changed  it  in  1887  to  a  gross  receipts  tax,  and  in  1891 
again  changed  to  a  tax  on  property,  now  assessed  by  a  board 
of  equalization.  These  instances  show  the  utter  lack  of 
uniformity  or  principle  in  American  taxation. 

Telephone  companies  have  lately  been  subjected  to  special 
taxes  in  all  but  one  of  the  same  commonwealths.  In  ten 
cases,  the  tax  is  the  same  as  that  on  telegraph  companies  ; 1 
in  the  remaining  cases  it  is  slightly  different.  Thus,  in 
Connecticut  it  is  twenty-five  cents  per  mile  of  wire  and 
seventy  cents  for  each  telephone  transmitter  ;  in  Florida, 
it  is  $100  on  each  telephone  plant  in  each  county, 
unless  the  line  is  less  than  twenty-five  miles  long,  when 
it  is  only  $25  ;  in  Georgia,  it  is  one  dollar  for  each  tele- 
phone station  or  box ;  in  Kentucky,  one-quarter  of  one 
per  cent  on  gross  receipts  ;  in  New  Hampshire,  the  usual 
property  tax  ;  in  Mississippi,  it  is  graded  according  to  the 
number  of  subscribers  ;  in  Texas,  twenty -five  cents  for  each 
telephone  ;  in  Wisconsin,  a  "  license  fee  "  of  one  and  a  half 
per  cent  on  gross  receipts  ;  and  in  Virginia,  a  general  prop- 
erty tax,  a  license  tax  of  $100  and  a  gross  earnings  tax  of 
one  per  cent. 

Express  companies  are  subject  to  much  the  same  taxes 
as  telegraph  companies.  Fourteen  commonwealths  tax  them 

1  Indiana,  Iowa,  Louisiana,  Minnesota,  New  Jersey,  New  York,  North 
Carolina,  Pennsylvania,  Rhode  Island  and  Vermont. 

M 


162  ESSAYS  IN  TAXATION 

on  gross  receipts.1  In  some  states,  as  in  Maryland  and  West 
Virginia,  the  gross  receipts  tax  applies  only  to  foreign  com- 
panies, the  domestic  companies  being  subject  to  the  general 
property  tax.  As  a  matter  of  fact,  however,  almost  all  the 
express  companies  are  foreign  companies.  In  New  Mexico 
and  South  Carolina  they  are  taxed  on  net  receipts.  In  many 
of  the  Southern  states  they  pay  a  license  or  privilege 
tax  either  fixed  or  according  to  mileage,  sometimes  in 
lieu  of  the  property  tax,  sometimes  in  addition  to  the  prop- 
erty tax,  and  sometimes  in  addition  to  other  taxes.  Thus  in 
Florida  there  is  a  tax  of  $1500  per  annum  ;  in  Kentucky, 
a  license  tax  of  $500  to  $1000  in  addition  to  the  local  prop- 
erty tax  ;  in  Mississippi,  a  privilege  tax  of  $500,  together 
with  a  tax  of  one  dollar  for  each  mile  of  railway  along  which 
they  operate,  and  a  local  property  tax  ;  in  Tennessee,  a  tax 
of  from  $1000  to  $2000  according  to  mileage  ;  in  Alabama,  a 
tax  of  one  dollar  per  mile,  if  the  line  does  not  exceed  five 
hundred  miles  in  length,  or  beyond  that,  from  $1000  to 
$5000  according  to  mileage.  In  Virginia  they  pay  a 
license  tax  of  $300  to  $500  according  to  mileage,  a  prop- 
erty tax  and  an  income  tax.  In  Missouri  they  pay  the 
property  tax  on  their  tangible  property  in  addition  to  a  tax 
of  one  and  a  quarter  per  cent  on  gross  receipts  within  the 
state,  deducting  the  amount  paid  by  them  to  railroad  or 
steamship  companies  for  transportation.  In  Indiana  a  some- 
what similar  law  was  changed  in  1891,  so  that  express 
companies  are  now  taxed  on  a  valuation  ascertained,  as  in 
the  case  of  telegraph  companies,  according  to  mileage  as 
explained  above.  In  Arkansas  the  capital  stock  is  also  as- 
sessed according  to  mileage.  In  New  Hampshire  express 
companies  may  pay,  in  lieu  of  the  "license"  on  gross  re- 
ceipts, a  fixed  sum  of  five  dollars  per  mile. 

From  the  fact  that  the  large  express  companies  are  gener- 
ally unincorporated,  the  question  has  recently  arisen  whether 

1  Alabama,  Connecticut,  Delaware,  Georgia,  Louisiana,  Maine,  New  Hamp- 
shire, New  Jersey,  New  York,  North  Carolina,  Ohio,  Pennsylvania,  Rhode 
Island  and  Vermont. 


THE  TAXATION  OF  CORPORATIONS  163 

they  are  liable  to  the  corporation  tax.  In  Vermont  and  Penn- 
sylvania joint-stock  companies  are  expressly  included.  In 
New  Jersey  the  tax  law  applies  only  to  corporations.  In  New 
York  express  companies  have  been  declared  liable  to  the  state 
corporation  tax  because  the  statute  expressly  applies  to  joint- 
stock  companies  ; l  but  under  the  provisions  of  the  revised 
statutes  imposing  a  tax  on  "all  monied  or  stock  corporations," 
which  still  governs  local  taxation  in  New  York,  it  has  been 
held  that  express  companies  are  not  liable.2  There  is,  of 
course,  no  good  economic  reason  for  their  exemption. 

Finally,  we  may  mention  the  palace  and  sleeping-car  com- 
panies. The  special  tax  on  these  companies,  which  is  found 
in  a  few  commonwealths,  is  based  on  various  elements.  In 
Florida,  Michigan,  New  Jersey,  New  Mexico,  New  York, 
North  Dakota,  Pennsylvania  and  Vermont,  it  is  on  gross 
receipts.  In  Arkansas,  Texas  and  Virginia,  it  is  on  capital 
stock  according  to  mileage ;  but  in  Virginia  there  is  an  addi- 
tional tax  on  income.  In  Georgia  and  Iowa,  it  is  proportioned 
to  the  number  of  cars  and  the  miles  run;  in  Nebraska  it  is 
proportioned  not  only  to  the  number  of  cars,  but  also  to  the 
average  time  employed  within  the  state.  In  Indiana,  the 
method  of  taxation  is  similar  to  that  described  above  for 
telegraph  companies.  In  a  few  of  the  Southern  states,  like 
Alabama  and  Tennessee,  license  and  privilege  taxes  of  fixed 
amount  are  imposed;  but  in  Alabama  there  is  an  additional 
mileage  tax.  In  some  cases,  like  Georgia  and  Missouri,  rail- 
road companies  are  taxed  for  their  sleeping  cars,  but  may 
then  recoup  from  the  sleeping-car  companies. 

5.    Miscellaneous  Corporations. 

In  addition  to  the  taxes  already  mentioned,  a  few  com- 
monwealths levy  taxes,  mostly  of  very  recent  date,  on 
other  specified  corporations.  In  order  to  make  the  survey 
complete,  they  will  be  noted  here.  We  find  in  Alabama 
a  tax  of  one  per  cent  on  the  gross  receipts  of  cotton 

i  117  N.  Y.  136.  2  133  N.  Y.  279. 


164  ESSAYS  IN  TAXATION 

pickeries  and  seed-oil  mills,  and  on  the  gross  income  of 
gas-works,  waterworks,  electric-light  companies,  ferries, 
toll-bridges,  public  mills  and  gins,  and  cotton  compresses ; 
but  as  the  tax  is  levied  only  after  deducting  the  expenses 
for  carrying  on  such  business,  it  is  really  on  net  income. 
In  Connecticut,  there  is  a  tax  of  two  per  cent  on  the 
gross  receipts  of  rolling-stock  companies,  and  a  so-called 
"tax  on  investment  companies,"  consisting  of  one  per 
cent  on  chases  in  action  sold  or  negotiated,  deducting  non- 
taxable  bonds  registered  with  the  state  treasurer.  The  tax 
on  railroads  has  also  been  extended  to  street  railways.  In 
Florida,  electric-light,  water  and  gas-light  companies  must 
pay  a  license  tax  of  $100  for  each  plant  in  each  county. 

In  Kentucky,  we  find  a  tax  on  the  stock  of  turnpike  com- 
panies at  the  rate  of  seven  per  cent  on  net  dividends  ;  also 
a  tax  on  street  railroads;  a  "tax  on  city  corporations" 
(which  is  in  reality  simply  a  tax  on  coffee-house  licenses 
in  Frankfort);  a  graduated  tax  on  gas  and  electric-light 
companies,  waterworks,  cotton  compresses,  cotton  pickeries, 
slaughter  houses,  liquor  distilleries  and  tobacco  factories ; 
and  a  two  per  cent  tax  on  the  gross  premiums  of  foreign 
building  and  loan  associations.  In  Louisiana,  there  is  a 
tax  on  the  gross  receipts  of  horse  railroads.  In  Maine, 
there  is  a  similar  tax,  but  with  a  graduated  scale  of  one- 
tenth  of  one  per  cent  for  every  thousand  dollars ;  a  fran- 
chise tax  on  trust  and  loan  associations  like  that  on  savings 
banks  described  above  ;  and  a  tax  of  one-quarter  of  one  per 
cent  on  the  monthly  capital  dues  of  building  associations. 

In  Massachusetts,  we  find  a  tax  of  one-twentieth  of  one 
per  cent  on  the  capital  stock  of  companies  for  the  purpose 
of  coal  mining  or  extracting  carbonaceous  oils ;  but  if  the 
company  is  incorporated  in  the  state,  the  tax  is  one  of 
four  per  cent  on  the  net  profits.  We  find  there  also  a 
"gas  commissioners  tax"  on  the  gross  earnings  of  gas  com- 
panies ;  and  a  "  gas  light  companies  tax "  on  the  appraised 
valuation  of  their  property  to  defray  the  expenses  of  the 
inspectors  of  gas  meters.  In  Michigan,  the  special  tax  on 


THE  TAXATION  OF  CORPORATIONS  165 

mining,  smelting  and  refining  companies  of  seventy  cents  per 
ton  of  copper,  one  cent  per  ton  of  iron,  and  five  mills  per 
ton  of  coal  obtained,  with  a  real  estate  tax  on  mining  com- 
panies on  the  excess  over  six  hundred  and  forty  acres,  was 
repealed  in  1891 ;  but  there  now  exists  a  tax  of  two  per  cent 
on  the  gross  receipts  of  special  freight  lines  or  car-loaning 
companies,  and  a  like  tax  on  the  gross  receipts  of  surety 
and  guaranty  companies.  In  Minnesota,  mining  corpora- 
tions must  pay  in  lieu  of  all  other  taxes  a  commutation 
tax  of  fifty  cents  per  ton  of  copper,  and  one  cent  per  ton 
of  coal  mined;  and  there  is  also  a  reciprocal  law  for  building 
and  loan  associations.  In  New  Hampshire  there  is  a  tax 
of  one  per  cent  on  the  stock  of  building  and  loan  associa- 
tions, and  a  tax  like  that  on  savings  banks  on  the  capital 
and  deposits  of  trust  companies.  In  New  Jersey  there  is 
a  tax  on  oil  or  pipe-line  companies  of  eight-tenths  of  one 
per  cent  on  the  gross  receipts ;  and  on  gas  and  electric 
light  companies  of  one-half  of  one  per  cent  on  gross  re- 
ceipts, and  five  per  cent  on  dividends  in  excess  of  four 
per  cent.  There  is  also  a  tax  of  two  per  cent  on  the  gross 
receipts  of  cable  companies.  In  New  York  we  find  a  "  pool 
tax  "  on  racing  associations  —  five  per  cent  of  the  gross  re- 
ceipts for  admission.  In  Pennsylvania  electric-light,  street 
passenger  railway,  pipe-line,  slack  water  navigation,  canal 
or  other  transportation  and  transmission  companies  pay 
eight-tenths  of  one  per  cent  on  gross  receipts,  in  addition 
to  the  general  corporation  tax.  In  Rhode  Island  there  is 
a  tax  of  one-quarter  of  one  per  cent  on  the  deposits  of 
trust  companies.  In  Vermont  we  find  a  tax  of  one  per 
cent  on  building  and  investment  trust  companies,  and  of 
two  per  cent  on  the  gross  receipts  of  steamboat,  car  and 
transportation  companies  (other  than  railroads)  incorpor- 
ated in  the  state,  as  a  tax  alternative  to  the  one  described 
above.  In  Virginia,  steamship  and  transportation  companies 
are  taxed  on  their  property  and  also  at  the  rate  of  one 
per  cent  on  their  income.  Finally,  in  some  of  the  South- 
ern commonwealths,  license  fees  or  "  privileges "  are  im- 


166  ESSAYS  IN  TAXATION 

posed  on  corporations  following  certain  specified  lines  of 
business.  In  almost  all  of  these  commonwealths  the  taxes 
referred  to  are  state  taxes,  while  for  local  purposes  the  cor- 
porations are  usually  still  subject  to  the  general  property 
tax,  or  to  the  tax  on  real  estate  and  capital  stock. 

The  third  movement  away  from  the  property  tax  has  been, 
as  noted  above,  the  introduction  of  a  tax  applicable  to  all 
corporations  in  general.  We  come  thus  to 

6.    The   General  Corporation  Tax. 

Here  again  Pennsylvania  took  the  lead,  for  in  that  state 
the  tax  is  far  older  than  might  be  imagined  from  its  recent 
introduction  into  other  commonwealths.  We  have  already 
seen  that  in  1824  Pennsylvania  imposed  a  tax  on  the  net 
dividends  of  banks.  In  1836  the  tax  was  extended  to  iron 
companies,  at  the  rate  of  eight  per  cent  on  all  dividends 
exceeding  six  per  cent.  In  this  provision  can  be  found  the 
germ  of  the  later  laws.  The  first  general  corporation  tax, 
imposed  in  1840,  provided  that  "  banks  and  all  corpora- 
tions whatever  "  which  declared  a  dividend  of  one  per  cent 
should  pay  "  in  addition  to  all  present  taxes "  one-half  mill 
for  each  dollar  of  the  dividend  or  profit,  and  an  additional 
one-half  mill  for  every  additional  one  per  cent  of  divi- 
dend. In  1844,  however,  an  act  was  passed  which  sketched 
in  broad  outline  the  path  of  future  development.  Accord- 
ing to  this  law  all  domestic  corporations  which  made  or  de- 
clared a  dividend  or  profit  of  at  least  six  per  cent  paid  a  tax 
on  capital  stock  of  one  half  mill  for  each  one  per  cent  of  divi- 
dend ;  but  if  the  dividend  was  less  than  six  per  cent,  the  tax 
was  three  mills  on  the  dollar.  This  law  continued  until  the 
act  of  1859  provided  that  the  three  mill  tax  should  be  paid 
only  if  no  dividend  was  declared ;  but  that  in  case  of  any 
dividend  (not,  as  before,  a  six  per  cent  dividend)  the  tax 
should  be  one-half  mill  on  the  capital  stock  for  each  one  per 
cent  of  dividend.  In  1864  it  was  provided  that  corporations 


THE  TAXATION  OF  CORPORATION'S  167 

not  paying  to  the  state  a  tax  upon  dividends  should  pay  three 
per  cent  on  net  earnings.  The  consolidated  act  of  1868  ex- 
cepted  from  the  general  corporation  tax  only  banks,  savings 
institutions  and  foreign  insurance  companies  (all  of  which 
were  separately  taxed),  but  imposed  a  tax  of  three  per  cent 
on  the  net  earnings  or  income  of  all  corporations,  except  those 
liable  to  the  tonnage  tax,  i.e.  the  transportation  companies. 

The  important  feature  of  this  law,  however,  was  that 
the  corporation  tax  was  now  made  applicable  to  all  com- 
panies incorporated  or  doing  business  in  the  state,  i.e.  to 
foreign  as  well  as  to  domestic  corporations.  Only  from  1868, 
therefore,  was  the  Pennsylvania  tax  a  general  corporation 
tax.  The  general  law  of  1874  made  no  change  except  in 
respect  to  transportation  companies  as  mentioned  above, 
and  with  the  further  exception  that  coal  companies  were  to 
pay  a  franchise  tax  of  three  cents  per  ton  transported.  In 
1879  the  line  of  division  in  the  tax  was  again  drawn  at  divi- 
dends of  six  per  cent  —  that  is,  the  principle  of  the  law  of 
1859  was  abandoned  and  that  of  1844  reinstated.  Limited 
partnerships,  except  those  organized  for  manufacturing  or 
mercantile  purposes,  were  put  on  the  same  footing  as  cor- 
porations; and  the  tonnage  tax  on  coal  companies  was  limited 
to  1881,  after  which  it  was  to  cease.  Manufacturing  cor- 
porations with  certain  exceptions  were  exempted  from  taxa- 
tion for  state  purposes,  and  a  loan  tax  of  four  per  cent  was 
imposed,  applicable  also  to  the  bonds  of  corporations.  In 
1885  the  latter  was  reduced  to  three  per  cent.  In  1889  the 
rate  was  fixed  at  one  half  mill  for  each  one  per  cent  of 
dividend,  if  dividends  amounted  to  six  per  cent,  and  at 
three  mills  when  dividends  were  less  than  six  per  cent. 
Finally,  in  1891  this  plan  was  abandoned  and  the  present 
amendments  were  adopted. 

Under  the  law  as  it  now  stands  in  Pennsylvania,  the  "  tax 
on  corporation  stock  "  applies  to  all  corporations,  joint-stock 
associations  and  limited  partnerships  doing  business  in  the 
state  or  having  any  portion  of  their  capital  invested  therein, 
except  banks  and  savings  institutions,  foreign  insurance  com- 


168  ESSAYS  IN  TAXATION 

panies,  and  manufacturing  companies  organized  exclusively 
for  manufacturing  purposes  and  actually  carrying  on  manu- 
facturing within  the  state.  Corporations  engaged  in  the 
brewing  or  distilling  of  malt  or  spirituous  liquors,  and  such 
as  enjoy  and  exercise  the  right  of  eminent  domain,  are  not 
included  in  this  exception.  The  rate  is  five  mills  on  each 
dollar  of  the  actual  value  of  the  whole  capital  stock  of  all 
kinds.  This  value,  ascertained  by  appraisement,  must  not  be 
less  than  the  average  price  for  which  the  stock  has  been  sold 
during  the  year,  nor  less  than  the  value  indicated  by  the  net 
earnings  or  by  the  profit  in  dividends  or  by  what  has  been 
carried  to  the  surplus  or  sinking  fund.  If  any  profit  has 
been  added  to  the  sinking  fund,  it  is  treated  as  if  it  had  been 
devoted  to  dividends,  unless  it  is  set  apart  expressly  for  the 
payment  of  debts.  In  the  case  of  fire  and  marine  insurance 
companies  the  rate  is  three  mills  on  each  dollar  of  capital 
stock.  In  addition  to  this  tax  on  corporation  stock,  there  is 
a  nominal  tax  of  three  per  cent  on  the  net  earnings  of  private 
bankers  and  brokers,  unincorporated  banks  and  all  corpora- 
tions except  those  liable  to  the  previous  tax  or  to  the  tax  on 
gross  receipts.  The  only  corporations  which  would  be  liable 
under  this  provision  are  banks  and  manufacturing  corpora- 
tions ;  but  the  latter,  with  the  exceptions  just  noted  as 
liable  to  the  tax  on  corporation  stock,  are  now  expressly 
exempt  from  all  taxation ;  and  the  former,  by  electing 
to  pay  eight  mills  on  the  par  value  of  their  capital  stock, 
secure  exemption  from  all  other  taxation  except  on  their 
real  estate.  Thus  the  net  earnings  tax  does  not  apply  to 
corporations  at  all.  If  the  banks  do  not  elect  this  eight  mills 
tax,  the  market  value  of  the  stock  is  assessed  to  the  stock- 
holders and  taxed  four  mills,  and  the  banks  are  further  subject 
to  local  taxation.  State  banks  must  pay  in  addition  a  small 
tax  —  five  dollars  for  banks  with  a  capital  of  $100,000, 
and  five  dollars  additional  for  each  $100,000,  together 
with  a  charge  of  two  per  mill  for  each  $1000  of  assets  —  to 
defray  the  expenses  of  bank  examination.  It  has  already 
been  noted  above  in  the  proper  connection  that  transporta- 


THE  TAXATION  OF  CORPORATIONS  169 

tion,  transmission,  electric-light  and  insurance  companies 
pay  a  tax  on  gross  receipts  or  premiums  in  addition  to  the 
general  corporation  tax. 

In  addition  to  the  tax  on  capital  stock,  Pennsylvania 
imposes  a  "tax  on  loans,"  which  exacts  four  mills  on  the 
dollar  of  all  interest  paid  on  any  scrip,  bond  or  certifi- 
cate of  indebtedness  issued  by  any  private  corporation,  and 
on  all  public  loans  (except  those  of  Pennsylvania  and  of  the 
United  States).  This  tax  has  been  declared  unconstitu- 
tional when  applied  to  mortgages  held  by,  or  in  the  hands 
of,  corporations.  The  decision  was  subsequently  formulated 
into  the  law  that  corporations  and  associations  liable  to  the 
capital  stock  tax  shall  not  be  required  to  pay  any  further 
tax  on  mortgages,  bonds  or  other  securities  belonging  to 
them,  and  which  constitute  any  part  of  their  assets  included 
within  the  appraised  value  of  their  capital  stock.  But  if 
they  hold  these  bonds  in  a  fiduciary  capacity,  they  are  liable. 
On  the  other  hand,  so  much  of  the  tax  as  is  imposed  on 
the  loans  made  by  corporations,  i.e.  on  corporate  obligations, 
has  been  upheld  as  a  proper  exercise  of  the  legislative 
authority  and  as  not  in  conflict  with  any  provision  of  the 
federal  constitution.  It  is  deemed  to  be  in  effect  a  tax  on 
the  bondholder,  not  on  the  corporation,  although  the  cor- 
poration is  required  to  advance  the  tax  and  deduct  it  from 
the  interest.  The  treasurers  of  corporations  therefore  pay 
the  tax  on  all  their  bonds  or  obligations  which  are  held  by 
residents,  and  then  deduct  the  tax  from  the  interest  due. 
Pennsylvania,  moreover,  taxes  public,  as  well  as  private, 
corporations. 

This  general  corporation  tax,  it  is  very  important  to  note, 
is  in  lieu  of  all  local  taxation.  In  Pennsylvania,  therefore, 
corporations  subject  to  the  capital  stock  tax  are  not,  with 
some  exceptions  noted  below,  locally  taxable. 

The  law  of  1885  exempted  manufacturing  corporations 
(with  certain  exceptions)  from  all  taxation  for  state  purposes; 
but  it  was  held  that  only  that  part  of  the  capital  of  a  manu- 
facturing company  which  was  invested  in  the  plant  actually 


170  ESS  Ays  IN  TAXATION" 

necessary  for  the  manufacture  of  its  product  could  be  ex- 
empted, and  that  the  capital  of  such  companies  invested 
in  mines  for  the  production  of  coal  to  be  used  in  the  process 
of  manufacturing,  or  any  other  capital  similarly  invested,  was 
taxable.  The  laws  of  1889  and  1891,  however,  provide  for 
the  exemption  of  those  companies  only  which  are  organized 
exclusively  for  manufacturing  purposes.  Manufacturing 
companies  are  held  to  be  limited  to  those  that  produce 
material  substances.1  In  regard  to  the  tax  on  loans,  since, 
as  we  have  just  seen,  it  is  held  to  be  not  upon  the  corpora- 
tion, but  upon  the  moneys  of  the  bondholder,  manufacturing 
corporations,  however,  are  liable  equally  with  others. 

Outside  of  Pennsylvania  the  general  corporation  tax  is 
found  only  in  New  York;  although  in  Maryland,  Massa- 
chusetts and  New  Jersey  there  are  general  taxes  on  domestic 
corporations,  and  in  a  few  other  cases  there  are  what  may  be 
called  in  one  sense  general  taxes  on  corporations. 

In  New  York  the  general  corporation  tax  came  later ; 
for  not  until  1880  was  a  law  passed  which  was  based  on 
the  Pennsylvania  act.  This  tax,  as  slightly  altered  at 
various  times,  is  declared  to  be  levied  on  the  corporate 
franchise  or  business  of  all  corporations,  joint-stock  com- 
panies or  associations,  except  savings  banks  and  institutions 
for  savings,  fire  and  marine  insurance  companies,  banks, 
foreign  insurance  companies,  agricultural  and  horticultural 
companies,  and  manufacturing  and  mining  corporations 
wholly  engaged  in  carrying  on  manufacturing  or  mining 
in  the  state.  These  exceptions,  however,  do  not  cover  trust 
companies,  gas  companies,  or  electric  or  steam  heating,  light- 
ing or  power  companies,  while  banks,  fire  and  marine 
insurance  companies,  and  foreign  insurance  companies  are 
separately  taxed.  The  only  companies  actually  exempted 
from  taxation  are,  therefore,  domestic  life  insurance  com- 
panies, agricultural  and  horticultural  companies,  and,  with 
the  exceptions  noted,  manufacturing  and  mining  corpora- 

1  For  the  decisions  here,  as  well  as  in  the  other  states,  see  the  chapter  iu 
the  work  referred  to  on  page  137. 


THE  TAXATION  OF  CORPORATIONS  171 

tions.  The  rate  is  just  one-half  that  of  the  former  Penn- 
sylvania tax,  i.e.  one-quarter  mill  upon  each  dollar  of  the 
capital  stock  for  each  one  per  cent  of  dividends  which 
amount  to  at  least  six  per  cent ;  but  when  dividends  fall 
below  six  per  cent  the  rate  is  one  and  a  half  mills.  By 
exception  in  the  case  of  hotel  companies  paying  dividends 
less  than  six  per  cent,  the  tax  is  assessed  on  the  excess  of 
their  capital  stock  over  the  assessed  valuation  of  their  real 
estate.  Corporations  subject  to  this  tax  are  exempted  from 
all  further  state  taxation  except  on  their  real  estate ;  but 
they  are  liable  to  local  taxation  on  their  whole  property, 
both  real  and  personal,  according  to  the  primitive  methods. 
The  additional  taxes  on  other  corporations  have  already 
been  described  under  the  appropriate  heading. 

In  Massachusetts,  the  general  corporation  tax  dates  from 
1864.  In  1863  indeed,  a  law  was  enacted  which  taxed  divi- 
dends paid  by  corporations  to  non-resident  stockholders; 
but  this  was  pronounced  unconstitutional,  and  was  replaced 
by  the  law  now  virtually  in  force.  This  tax  is  declared  to  be 
levied  on  the  corporate  franchise  of  all  domestic  corporations 
except  banks  and  coal  and  mining  companies,  which  are 
separately  provided  for ;  and  is  imposed  on  the  market 
value  of  the  shares  of  their  capital  stock,  deducting  the  value 
of  the  real  estate  and  machinery,  which  are  locally  taxable. 
The  rate  is  determined  by  an  apportionment  of  the  whole 
amount  to  be  raised  by  property  taxes  in  the  commonwealth 
during  the  year,  upon  the  aggregate  valuation  of  all  the 
towns  and  cities  for  the  preceding  year.  Every  munici- 
pality is  then  credited  with  the  proportion  of  the  tax  repre- 
sented by  the  number  of  shares  held  by  residents  of  that 
place,  the  commonwealth  retaining  only  that  proportion  of 
the  tax  which  corresponds  to  the  stock  of  non-residents. 
In  the  case  of  railroads,  only  such  proportion  of  the  valuation 
of  the  stock  is  assessed  as  the  length  of  that  part  of  the 
road  lying  within  the  commonwealth  bears  to  its  total  length. 
A  very  important  point  to  be  noticed  is  that  in  Massachu- 
setts the  tax  applies  only  to  domestic  corporations,  not  as 


172  ESSAYS  IN  TAXATION 

in  New  York  and  Pennsylvania  to  foreign  corporations. 
Massachusetts  taxes  the  latter  only  on  their  property 
actually  situated  in  the  state  ;  but,  on  the  other  hand,  as 
we  shall  see  later  on,  taxes  shareholders  in  foreign  corpo- 
rations, while  exempting  shareholders  in  domestic  corpora- 
tions from  any  additional  tax.  Massachusetts  therefore 
has  in  reality  no  general  corporation  tax. 

In  New  Jersey,  the  tax  on  "  miscellaneous  corporations  " 
dates  from  1884,  and  is  described  as  a  "  license  for  the  cor- 
porate franchise."  As  amended  in  1892,  it  applies  to  all 
corporations  except  railroads  and  canals  (both  of  which  are 
taxed  separately),  banks,  cemeteries,  religious,  charitable  or 
educational  associations,  and  manufacturing  or  mining  com- 
panies at  least  fifty  per  cent  of  whose  outstanding  capital 
is  invested  in  business  in  the  state.  If  the  latter  have  less 
than  fifty  per  cent  of  their  capital  so  invested,  they  pay 
the  tax  on  capital  stock  mentioned  below,  but  may  deduct 
the  assessed  value  of  the  property  so  used  in  manufacture  or 
mining.  Telegraph,  telephone,  cable,  express,  parlor  car, 
gas,  electric-light,  insurance,  oil  and  pipe-line  companies,  as 
we  have  seen  above,  are  taxed  under  this  law  in  a  special 
manner,  i.e.  on  receipts,  premiums  and  dividends.  All  other 
companies  included  under  the  head  "  miscellaneous  corpora- 
tions," pay  a  yearly  "license  fee"  or  "franchise  tax"  of 
one-tenth  of  one  per  cent  on  the  capital  stock  issued  and 
outstanding  up  to  three  million  dollars  ;  one-twentieth  of 
one  per  cent  on  the  capital  between  three  and  five  millions ; 
and  fifty  dollars  additional  for  each  one  million  dollars  capi- 
tal in  excess  of  five  millions.  This  tax  applies,  except  in  the 
case  of  insurance  companies,  only  to  domestic  corporations. 
But  it  is  to  be  borne  in  mind  that  railroad  companies  are  not 
included  in  this  tax  on  miscellaneous  corporations. 

In  Maryland,  the  "  tax  on  incorporated  institutions"  dates 
in  a  certain  sense  from  1841,  when  all  domestic  corporations 
which  declared  dividends  were  required  to  return  the  stock 
owned  by  non-residents,  and  to  pay  the  state  general  prop- 
erty tax  thereon  to  the  collector  of  the  place  where  the 


THE  TAXATION  OF  CORPORATIONS  173 

corporation  or  its  chief  office  was  situated.  In  1842  this 
obligation  was  extended  to  stock  owned  by  residents  ;  and 
in  1847  the  corporations  were  required  to  pay  the  tax  whether 
or  not  they  had  earned  dividends.  The  county  tax  was,  more- 
over, still  collected  from  the  shareholder.  Early  in  the  seven- 
ties the  system  was  slightly  changed  ;  in  1878  the  present 
method  was  introduced,  and  the  office  of  tax  commissioner 
created.  This  tax  is  levied  on  the  capital  stock,  or,  if  there 
be  none,  on  the  property  and  assets  of  all  corporations  incor- 
porated or  doing  business  in  the  state,  and  of  all  joint-stock 
companies  doing  business  in  the  state,  except  steam  railroads 
and  savings  institutions,  both  of  which  are  taxed  separately. 
Deductions  are  made  from  this  valuation  for  the  assessed 
value  of  real  property  (separately  taxed),  for  the  capital 
invested  in  property  which  already  pays  taxes,  for  the  non- 
taxable  securities  held,  and,  in  the  case  of  building  associa- 
tions, for  mortgages  on  taxable  property.  The  corporations 
pay  at  the  rate  of  the  general  property  tax,  on  only  so  much 
of  the  stock  as  is  owned  by  residents  of  the  state.  They  are 
also  required  to  pay,  under  a  law  dating  from  1847,  the  general 
property  tax  on  all  interest-bearing  bonds,  certificates,  or  evi- 
dences of  debt,  owned  by  residents,  deducting  the  amount 
from  the  interest  due  the  bondholders.  The  corporation  taxes 
in  Maryland,  therefore,  have  only  a  very  limited  scope. 

In  Kentucky,  we  find  since  1892,  in  addition  to  the  prop- 
erty tax,  a  franchise  tax  on  all  corporations  or  associations 
"  having  or  exercising  any  special  or  exclusive  privilege  or 
franchise  not  allowed  to  natural  persons,  or  performing  any 
public  service."  This  would  not  include  ordinary  industrial 
associations. 

In  Illinois,  all  corporations  except  railroads  (which  are 
separately  taxed),  manufacturing,  newspaper  and  stock- 
holding companies  are  assessed  on  the  excess  of  their  capital 
stock  and  debt  over  and  above  the  value  of  their  tangible 
property.  But  the  capital  stock  tax  is  regarded  as  a  part  of 
the  general  property  tax,  and  figures  among  its  receipts. 
It  applies,  moreover,  only  to  domestic  corporations,  for 


174  ESSAYS  IN  TAXATION 

foreign  corporations  are  taxable  only  on  their  tangible 
property  in  the  state. 

Finally,  in  a  few  other  states,  like  Alabama,  Georgia, 
Indiana,  Kansas,  Kentucky  and  North  Carolina,  corpora- 
tions in  general  are  taxed  at  the  ordinary  rate  of  the  prop- 
erty tax  on  the  value  of  the  capital  stock  over  and  above  the 
value  of  the  realty  and  tangible  personalty.  This  is,  how- 
ever, practically  only  a  modification  of  the  general  property 
tax.  In  only  a  few  of  these  states,  like  Indiana,  where 
transportation  and  several  other  companies  are  taxed  in  a 
special  way,  as  described  in  the  preceding  pages,  is  pro- 
vision made  for  the  taxation  of  the  franchise.  In  Alabama, 
there  is  a  tax  dating  from  1866  on  the  dividends  of  all  cor- 
porations doing  business  in  the  state ;  but  since  the  divi- 
dends are  simply  classed  as  personal  property,  the  tax  yields 
almost  nothing.  There  was  formerly  also  a  tax  on  the  in- 
comes of  corporations,  but  this  seems  to  have  been  rarely 
assessed  and  was  abolished  in  1884. 

It  may  also  be  mentioned  that  Virginia  had  a  general 
corporation  tax  for  a  short  period.  In  1843  a  tax  of  two 
and  a  half  per  cent  was  imposed  on  the  dividends  of  all 
corporations,  except  as  to  the  stock  held  outside  of  the 
state,  but  in  1846  the  tax  was  reduced,  and  was  then  allowed 
to  disappear.  During  the  Civil  War,  again,  a  tax  was  im- 
posed on  steamboat  companies  and  "  companies  of  a  similar 
character."  The  law  defined  capital  as  stock  subscribed, 
money  deposited,  bonds,  certificates  and  other  evidences  of 
debt,  so  that  the  tax  was  thus  really  laid  on  stock  plus  total 
indebtedness. 

We  see  then  that  only  in  Pennsylvania  and  in  New  York 
are  there  general  corporation  taxes  applicable  to  practically 
all  foreign  as  well  as  to  domestic  corporations.  In  Mary- 
land the  corporation  tax,  although  nominally  applicable  to 
foreign,  is  in  reality  levied  almost  exclusively  on  domestic 
companies.  In  the  other  cases,  the  law  applies  in  terms 
only  to  domestic  corporations,  except  that  in  Kentucky  it 
includes  certain  classes  of  domestic  and  foreign  corporations. 


THE  TAXATION  OF  CORPORATIONS  175 

In  Maryland  and  Massachusetts  again,  the  tax  is  really  a 
general  property  tax  on  shares  of  stock,  although  paid  by 
the  corporation.  Maryland  and  Pennsylvania  are  the  only 
states  which  levy  taxes  on  corporate  bonds,  although  virtu- 
ally only  on  the  bonds  of  domestic  corporations  in  the  hands 
of  residents.  Finally,  only  in  Pennsylvania  is  the  corpora- 
tion tax  in  lieu  of  local  taxation  ;  and,  on  the  other  hand, 
only  in  Kentucky  is  the  corporation  tax  payable  to  local 
bodies  also,  in  addition  to  the  state  corporation  tax  and  to 
the  state  and  local  property  taxes.  The  important  questions 
that  have  arisen  in  connection  with  these  points  will  be  dis- 
cussed below. 

A  mistake  often  made  is  that  of  confounding  with  the 
corporation  tax  what  may  be  called  the  tax  on  corporate 
charters.  This  is  in  reality  a  license  fee  charged  for  the 
privilege  of  incorporation  or  of  increasing  the  capital  stock 
of  a  company,  and  it  is  generally  either  a  fixed  lump  sum,  or 
a  percentage  of  the  amount  of  the  capital  stock.  It  is  found 
in  sixteen  commonwealths,  most  of  which  already  possess  a 
corporation  tax  proper.  In  Alabama  and  in  Illinois,  it  is 
called  "license  fees."  In  Connecticut,  it  applies  only  to  for- 
eign corporations  seeking  a  charter  in  the  state,  and  is  termed 
the  "tax  on  corporate  franchise,"  although  quite  unlike  the 
franchise  taxes  in  other  commonwealths ;  in  Kentucky,  it 
is  called  the  "  tax  on  organization "  ;  in  Maine,  the  "  tax 
on  new  corporations"  ;  in  Maryland,  "bonus  on  stock"; 
in  Missouri,  the  "  corporation  tax  "  or  the  "  tax  on  corpora- 
tions incorporating  "  ;  in  New  Hampshire,  "  charter  fees  "  ; 
in  New  Jersey,  the  "  tax  on  Certificates  of  incorporation  "  ; 
in  New  York,  the  "  organization  of  corporations  tax "  ;  in 
Ohio,  "  organization  fee "  ;  in  Pennsylvania  and  Rhode 
Island,  "  bonus  on  charters "  ;  in  Texas,  "  franchise  tax " 
in  Vermont,  "  corporation  license  tax  "  ;  in  West  Virginia, 
where  it  is  paid  annually,  "license  tax  on  charters  and 
certificates  of  corporations."  In  some  of  these  cases,  like 
Kentucky,  New  York  and  Pennsylvania,  the  tax  is  payable 
also  on  a  subsequent  increase  of  capital  stock.  In  a  few  states, 


176  ESS AyS  IN-  TAXATION 

like  Texas,  it  is  levied  on  foreign  as  well  as  on  domestic 
corporations  ;  while  in  Connecticut,  it  is  levied  only  on  for- 
eign corporations.  Finally,  some  states  follow  the  New  York 
plan  and  impose  the  tax  also  on  joint-stock  companies. 

These  taxes  have  really  nothing  in  common  with  the 
corporation  taxes  properly  so  called.  In  Pennsylvania  and 
Ohio,  for  instance,  it  is  held  to  be  not  a  tax  at  all,  but  a 
price  paid  for  the  chartered  privilege.  The  distinction  be- 
tween the  tax  on  corporate  charters  and  the  corporation 
tax  proper  can,  perhaps,  best  be  expressed  by  saying  that  if 
the  latter  is  a  tax  on  the  right  to  be,  the  former  is  a  tax  on 
the  right  to  become. 

III.    Bases  of  the  Tax. 

The  summary  just  presented  shows  the  chaos  of  principle 
in  which  the  whole  subject  is  involved.  An  analysis  of  the 
facts  discloses  no  less  than  thirteen  important  methods  of 
taxing  corporations,  not  counting  the  various  combinations 
of  method  which  are  practised  in  some  states.1  The  bases 
on  which  the  taxes  are  assessed  are  as  follows  :  — 

1  The  practical  importance  of  the  tax  is  shown  by  the  figures  of  its  yield 
in  1894,  even  though,  owing  to  the  financial  depression,  the  revenues  were 
considerably  less,  especially  in  New  York,  than  in  the  preceding  year.  In 
the  following  table  the  yield  of  the  property  tax  is  included,  for  sake  of 
comparison. 

Pennsylvania : 

Tax  on  personal  property   .......        $2,386,750 

corporation  stock    ....  $  3,635,624 

gross  receipts           ....  775,830 

banks 635,142 

net  earnings 78,086 

foreign  insurance  companies  .       .  495,758 

gross  premiums       ....  55,815 

corporation  loans    ....  1,188,912 

Bonus  on  charters 215,248          6,780,415 

New  York : 

Tax  on  property  ........        $6,018,170 

"     "  corporations  .....       $1,645,879 

Organization  tax 150,761  1,796,641 


THE  TAXATION  OF  CORPORATIONS  177 

1.  Value  of  the  property,  i.e.,  the  realty  plus  the  visible  and 
invisible  personalty.  This  was  originally  the  universal  method 
and  it  is  still  the  practice  in  the  great  majority  of  cases. 

2.  Cost  of  the  property.    This  was  the  general  rule  in  New 
Jersey  from  1873  to  1876  as  to  all  railroad  companies,  and  is 
still  the  rule  in  isolated  cases,  as  in  New  York  in  the  local 
taxation  of  telegraph  companies. 

3.  Capital  stock  at  par  value.     This  is  true  of  the  general 
corporation  law  in  New  Jersey,  of   mining   companies   in 
Massachusetts,   and   of  banks   and   savings   institutions   in 
Pennsylvania. 

4.  Capital  stock  at  market  value.     This  is  true  of  the  gen- 
eral corporation  law  in  Massachusetts  and  New  York  when 
applied  to  corporations  where  the  dividends  are  less  than  six 
per  cent.     It  was  true  of  railroads  in  Connecticut  between 
1849  and  1864.     It  is  also  the  custom  in  local  taxation  in 
many  states. 

5.  Capital  stock  plus  bonded  debt  at  market  value.     This  is 
true  of   all  corporations  in  Pennsylvania  and  in  Maryland 
(with  certain  restrictions),  and  of  railroads  in  Georgia  and 
in  Illinois.     In  the  case  of  railroads  in  New  Jersey  and  of 
other  corporations  in  Illinois,  only  the  surplus  of  this  valua- 
tion over  the  value  of   the  tangible  property  is  made  the 
basis  of  the  tax.     In  Maryland  only  the  surplus  over  the 
value  of  the  real  estate  is  taxable  as  capital  stock. 

Massachusetts : 

Property  tax $  2,010,945 

Corporation  taxes 6,218,000 

New  Jersey : 

Tax  on  property $2,026,110 

"     "  railroad  corporations     .        .        .       $1,096,850 
"      "  miscellaneous     "  ...  670,849 

Local  tax  on  railroads         ....  391,208          2,158,907 

Vermont  (1893)  : 

Property  tax $264,097 

Corporation  tax 843,090 

Maryland  (1893)  : 

Corporation  tax 340,490 


178  ESSAYS  IN  TAXATION 

6.  Capital  stock  plus  total  debt,  both  funded  and  floating. 
This  is  true  of  railroads  in  Connecticut,  and  it  was  true  of 
steamboat  companies  and  of  similar  corporations  in  Virginia 
during  the  Civil  War. 

7.  Bonded  debt  or  loans.     This  was  true  of  railroads  and 
canals  in  Virginia  from  1872  to  1874,  and  is  now  true  of  all 
corporations  in  Maryland  and  in  Pennsylvania.     In  all  these 
cases,  however,  it  is  only  supplementary  to  the  tax  on  capital 
stock.    This  tax  is  urgently  recommended  by  the  comptroller 
of  New  York. 

8.  Business  transacted.     This  is  true  in  several  states  of 
savings  banks  taxed  on  their  deposits ;  in  New  York  of  for- 
eign banks ;  in  New  Hampshire  and  Vermont  of  trust  com- 
panies taxed  on  deposits  ;  in  Connecticut  and  Massachusetts 
of   insurance  companies  taxed  on  the  amount  insured ;    in 
Connecticut  and  Georgia  of  telephone  companies  taxed  on 
the  number  of  telephone  transmitters ;  in  Georgia  and  Iowa 
of   sleeping-car  companies  taxed  according  to  the  number 
and  mileage  of   cars ;    in  Delaware   of   railroads   taxed  on 
the  number  of  locomotives  and  passengers  ;  in  Michigan  of 
mining  and  smelting  companies  taxed  on  tonnage.     It  was 
also  true  in  Pennsylvania  from  1868  to  1874  of  railroads ; 
from  1868  to  1881,  of  coal  companies  taxed  on  tonnage ;  and 
from  1870  to  1889  of  boom  companies  taxed  on  the  number 
of  logs  rafted. 

9.  Gross  earnings.     This  is  true  in  many  states  of  insur- 
ance companies  taxed  on  gross  premiums,  and  of  transporta- 
tion and  other  companies  taxed  on  gross  receipts. 

10.  Dividends.      This   is   true   of   gas   and   electric-light 
companies  in  New  Jersey,  of  turnpike  companies  in  Kentucky, 
and  of  corporations  in  general  in  Alabama.     It  was  formerly 
true  of  banks  and  iron  companies  in  Pennsylvania,  and  of 
banks  and  insurance  companies  in  Ohio  and  Virginia. 

11.  Capital  stock  according  to  dividends.     This  is  true  in 
New  York  of  all  corporations,  when  the   dividends  are  at 
least  six  per  cent.     It  was  formerly  true  of  banks  in  North 
Carolina  and  of  all  corporations  in  Pennsylvania. 


THE  TAXATION-  OF  CORPORATIONS  179 

12.  Net  earnings.     This  is  true  of  railroads  in  Delaware 
and  Virginia  ;  of  insurance  companies  in  Alabama,  Indiana, 
Maine   and   Nebraska  ;    of   foreign  insurance  companies  in 
Illinois,  Missouri,  and  New  Jersey  ;    of  express  and   sleep- 
ing  car   companies  in    Virginia  ;    of   mining   companies  in 
Massachusetts  ;  of  savings  banks  without  capital  stock   in 
Pennsylvania ;    and    of    gas-works,    waterworks,    electric- 
light  companies,  ferries,  toll-bridges,  public  mills  and  gins, 
and  cotton  compresses  in  Alabama. 

13.  Franchise.     This  is  true  of  a  large  number  of  cases ; 
but  the   term  franchise,  as  we  shall  see,  denotes  nothing 
definite,  and  the  value  of  the  franchise  is  measured  by  each 
one  of  the  preceding  twelve  tests  except  that  of  property. 

From  this  survey  of  the  existing  confusion,  it  is  plain  that 
we  are  still  groping  in  the  dark  and  that  no  one  method 
has  yet  preeminently  commended  itself  to  the  American 
sense  of  justice  and  expediency.  In  the  next  chapter  we 
shall  learn  the  judicial  interpretation  put  upon  these  various 
methods,  and  shall  attempt  to  analyze  the  situation  from 
the  economic  point  of  view.  That  some  change  is  impera- 
tive seems  evident ;  precisely  what  the  change  should  be  can 
be  ascertained  only  after  careful  consideration.  It  is  a  com- 
plicated problem  that  confronts  us. 


CHAPTER  VII. 

THE  TAXATION  OF  COBPOEATIONS. 

II. 
THE  PRINCIPLES. 

IN  the  preceding  chapter  we  traced  the  history  and  actual 
condition  of  the  corporation  tax  in  the  United  States.  The 
whole  subject  was  shown  to  be  involved  in  almost  inextri- 
cable confusion,  amid  which,  however,  some  thirteen  different 
bases  for  levying  the  tax  might  be  distinguished.  These,  it 
will  be  remembered,  were  the  value  of  the  property,  capital 
stock  at  par  value,  capital  stock  at  market  value,  capital  stock 
plus  bonded  debt,  capital  stock  plus  total  debt,  loans,  busi- 
ness, gross  earnings,  dividends,  capital  stock  according  to 
dividends,  net  earnings  and  franchise.  In  the  attempt  to 
analyze  these  methods  it  may  be  well  to  begin  with  the  last, 
on  account  of  its  obscurity  as  well  as  of  its  importance. 

I.    The  Franchise  Tax. 

At  the  outset  we  are  confronted  by  the  question :  what  is 
a  franchise  ?  The  matter  has  been  brought  squarely  before 
the  public  by  the  provisions  of  the  California  constitution 
of  1879,  and  since  then  by  tax  laws  of  several  states  which 
prescribe  that  franchises  of  corporations  shall  be  separately 
assessed.  Before  we  can  discuss  the  franchise  tax,  however, 
we  must  attempt  to  ascertain  what  a  franchise  really  is. 

Blackstone  defines  a  franchise  as  "  a  royal  privilege 
or  branch  of  the  King's  prerogative  subsisting  in  the  hands 
of  a  subject."  But  his  definition  is  too  vague  for  our  pur- 

180 


THE  TAXATION  OF  CORPORATIONS  181 

poses.     The  Supreme  Court  of  the  United  States  has  given 
this  definition :  — 

A  franchise  is  a  right,  privilege  or  power  of  public  concern  which 
ought  not  to  be  exercised  by  private  individuals  at  their  mere  will 
and  pleasure,  but  which  should  be  reserved  for  public  control  and  ad- 
ministration, either  by  the  government  directly  or  by  public  agents 
acting  under  such  conditions  and  regulations  as  the  government 
may  impose  in  the  public  interest  and  for  the  public  security.1 

This  definition,  however,  is  somewhat  too  narrow,  since  it 
emphasizes  unduly  the  element  of  public  control  and  public 
interest.  These  are  indeed  very  desirable  adjuncts,  but  they 
scarcely  seem  to  be  indispensable  parts  of  the  conception. 
Nothing  is  more  common  than  the  possession  by  a  purely 
private  corporation  of  a  franchise  —  for  example,  the  mere 
privilege  to  act  as  a  corporation.  Furthermore,  a  privilege 
of  a  public  character,  like  that  possessed  by  a  railway,  is  not 
necessarily  confined  to  corporations.  Thus,  there  is  nothing 
to  prevent  the  grant  of  the  right  of  eminent  domain  to  pri- 
vate persons.  We  therefore  conclude  that  a  franchise  in  the 
wider  sense  is  simply  a  right  conferred  by  government  of 
conducting  an  occupation  either  in  a  particular  way  or  ac- 
companied with  particular  privileges.  The  motive  may  be 
either  public  welfare  or  public  revenue.  This  can  be  clearly 
seen  by  tracing  the  historical  development  of  the  franchise. 
One  of  the  chief  sources  of  royal  income  in  mediaeval 
Europe  consisted  in  the  so-called  "fines  for  licenses,  conces- 
sions, and  franchises."  These  were  payments  by  individuals 
or  associations  for  all  kinds  of  special  privileges,  such  as  to  se- 
cure the  general  favor  of  the  crown,  to  retain  or  to  quit  ofiice, 
to  obtain  the  right  of  exporting  commodities,  to  conduct  some 
business  in  a  particular  way,  to  obtain  special  jurisdictional 
privileges,  to  possess  the  right  of  firma  burgi,  and  so  on.2 

1  California  vs.  Southern  Pacific  R.  R.  Co.,  127  U.  S.  40. 

2  A  characteristic  example  of  a  fine  or  franchise  hard  to  classify  is  this : 
The  wife  of  Hugo  de  Neville  paid  the  king  two  hundred  hens  ' '  eo  quod  possit 
jacere  una  nocte  cum  domino  suo  "  (who  happened  to  be  in  prison).    Hotuli 
Finium,  6  ;  quoted  in  Madox,  History  of  the  Exchequer,  i.,  p.  471. 


182  ESSAYS  IN  TAXATION- 

A  most  common  instance  can  be  found  in  the  trading  privi- 
leges of  the  guilds,  granted  chiefly  for  the  sake  of  the 
accruing  emoluments.  Similar  to  these  mediseval  conces- 
sions are  the  modern  licenses,  especially  in  the  Southern 
commonwealths,  which  are  conferred  on  individuals  and  cor- 
porations alike,  and  in  most  cases  for  purely  fiscal  reasons. 
What  are  called  franchise  taxes  elsewhere  are  known  in  the 
South  simply  as  privilege  or  occupation  taxes.  A  franchise 
of  an  individual  or  of  a  corporation  is,  therefore,  simply  a 
privilege  —  something  over  and  above  the  value  of  the  prop- 
erly, and  in  a  measure  analogous  to  the  "  good  will "  of 
a  firm.  It  is  the  indefinite  something  which  gives  vitality 
to  the  enterprise  and  makes  its  business  worth  having. 

In  the  case  of  a  corporation  this  indefinite  something  is 
the  privilege  that  individuals  possess  to  act  as  one,  with  legal 
individuality  and  immortality,  and  with  divisible  share 
capital.  This  is  a  privilege  which  corporations  share  equally 
with  joint-stock  companies  ;  accordingly,  the  corporation  tax 
is  frequently  made  applicable  also  to  such  associations.  A 
modern  stock-corporation  indeed  possesses  another  privilege, 
which  is  exclusive  to  it,  namely,  limited  liability.  The  cor- 
porate franchise  therefore  is  really  the  privilege  of  juristic 
personality  and  limited  liability  ;  it  is  the  right  to  exist  as  a 
corporation.1  Since  it  is  something  separate  and  apart  from 
the  property  of  the  corporation,  it  is  capable  of  being  taxed.2 

What  has  been  said  applies,  however,  only  to  domestic 
corporations.  In  the  case  of  a  foreign  corporation,  the  state 
which  has  not  given  the  franchise  cannot  tax  it.  With  a 
domestic  corporation  the  franchise  or  right  to  exist  is  an 

1  "  By  the  term  corporate  franchise  we  understand  is  meant  the  right 
or  privilege  given  by  the  state  to  two  or  more  persons  of  being  a  corporation, 
that  is,  of  doing  business  in  a  corporate  capacity."  Home  Insurance  Co.  vs. 
State  of  New  York,  134  U.  S.  594.  Cf.  Western  Union  Telegraph  Co.  vs. 
Mayer,  28  Ohio  State  521. 

*  "  Nothing  is  better  settled  than  that  the  franchise  of  a  private  corpora- 
tion ...  is  property  and  of  the  most  valuable  kind,  as  it  cannot  be  taken 
for  public  use  without  compensation."  Wilmington  R.  R.  Co.  vs.  Reed,  13 
Wall.  264,  268. 


THE  TAXATION  OF  CORPORATIONS  183 

empty  right,  if  the  corporation  may  not  transact  business  ; 
the  right  to  exist  is  therefore  inextricably  bound  up  with 
the  right  to  carry  on  the  business.  But  as  regards  a 
foreign  corporation,  the  two  things  are  distinct,  and  die 
state  can  tax  only  the  privilege  of  carrying  on  the  business 
within  its  borders.  The  corporate  franchise  has  no  existence 
apart  from  the  laws  of  the  state  which  created  it.  In  order 
to  avoid  trouble,  therefore,  the  corporation  tax  is  usually 
imposed  on  "  the  corporate  franchise  or  business  ;  "  and  the 
New  York  tax  has  been  upheld  as  applicable  to  foreign  cor- 
porations as  a  tax  on  their  business,  not  on  their  franchise.1 

The  denial  of  the  right  to  tax  the  franchises  of  foreign 
corporations  applies  equally  to  corporations  chartered  by  the 
United  States  which  are  not  legally  foreign  corporations.2 
Even  national  banks  cannot  be  subjected  to  license  or  priv- 
ilege taxes.3  Some  recent  cases  in  Pennsylvania  have  even 
held  that  the  tax  on  capital  stock  is  invalid  as  to  stock 
invested  in  a  patent  right,  because  such  taxation  involves  a 
property  right  which  depends  for  its  existence  exclusively 
on  the  federal  constitution  and  on  an  act  of  Congress.4  This 
seems  to  be  an  extreme  application  of  the  general  principle, 
which,  if  persisted  in,  will  have  important  economic  results. 
It  will  render  a  great  part  of  our  corporation  tax  laws  prac- 
tically nugatory.  For  almost  every  corporation  utilizes 
something  covered  by  a  patent ;  and  if  it  is  held  that  the 
capital  stock  represents  in  whole  or  in  part  this  patented 
property,  the  corporation  would  to  that  extent  escape  taxation. 

Subject  to  these  qualifications  and  to  the  principle,  to  be 
discussed  below,  that  no  commonwealth  may  impose  a  fran- 

1  People  vs.  Equitable  Trust  Co.  of  New  London,  Conn.,  96  N.  Y.  396. 

2  California  vs.  Southern  Pacific  B.  R.  Co.,  127  U.  S.  40.    See  Cal.  Code, 
sec.  3665,  amended  March,  1891. 

8  Mayor  vs.  National  Bank  of  Macon,  59  Ga.  648 ;  City  of  Carthage  vs. 
Bank  of  Carthage,  71  Mo.  508  ;  National  Bank  of  Chattanooga  vs.  Mayor,  8 
Heiskell  814. 

*  Commonwealth  vs.  Westinghouse  Co.,  151  Pa.  State  266;  Common- 
wealth vs.  Air  Brake  Co.,  id.  265 ;  Commonwealth  vs.  Philadelphia  Co.,  157 
Pa.  527  ;  Commonwealth  vs.  Lehigh  C.  and  I.  Co.,  162  Pa.  603. 


184  ESSAYS  IN  TAXATION 

chise  tax  to  interfere  with  interstate  commerce,  the  taxation 
of  corporate  franchise  has  no  limitation,  except  the  discre- 
tion of  the  taxing  power.1 

Greater  difficulties  arise  when  an  attempt  is  made  to 
measure  the  franchise  of  a  corporation.  We  have  seen 
that  there  are  not  less  than  thirteen  separate  methods  of 
taxing  corporations  and  that  each  of  these  methods,  with  one 
exception,  is  declared  to  involve  a  franchise  tax.  There  are 
yet  other  methods  of  measuring  franchise,  such  as  the  value 
of  the  capital  stock  less  the  value  of  the  property,  the  value 
of  the  stock  less  the  value  of  the  tangible  property,  the 
value  of  the  stock  less  the  value  of  the  realty,  the  value 
of  the  stock  and  bonds  less  each  or  all  of  these  items,  etc. 
There  is  a  total  lack  of  uniformity.  Each  commonwealth 
^  measures  the  franchises  of  its  corporations*  in  J^ts_own  way ; 
and  frequently  a  given  commonwealth  measures  the  fran- 
chises of  different  corporations  in  entirely  different  ways. 
There  is  an  ntter  absence  of  any  common^bahdard  ^of 
measurement.  Capital  stock,  stock  minus  property,  stock 
minus  realty,  bonded  debt,  business,  gross  earnings,  dividends, 
profits,  etc.,  are  each  declared  to  be  the  value  of  the  franchise. 
The  result  is  hopeless  confusion.  It  would  be  useless  to 
examine  the  methods  of  all  the  states  ;  a  single  example  — 
that  of  New  Jersey  —  will  suffice. 

The  state  board  of  assessors  of  New  Jersey  have  published 

since  1884  several  bulky  volumes  in  which  they  discuss  the 

details  of  corporate  assessment.     In   the  case  of  railroads 

they  have  adopted  the  following  plan.2     The  market  value 

of  the  stock  is  added  to  the  market  value  of  the  debt ;  from 

<  this   aggregate   the   total   value   of   the  tangible  corporate 

property  is  deducted,  and  the  remainder  is  declared  to  be 

/  the  "  adventitious  value   of  the  entire  road,  its  privileges 

1  included."     Sixty  per  cent  of  this  is  taken  as  the  value  of 

1  Delaware  Railroad  Tax  Case,  18  Wall.  231 ;   California  vs.  Southern 
Pacific  R.  R.  Co.,  127  U.  S.  41. 

2  Report  of  the  State  Board  of  Assessors  of  New  Jersey,  1884,  p.  26  ;  1885j 
p.  11  ;  1886,  p.  28  ;  1888,  p.  6. 


THE  TAXATION  OF  CORPORATIONS  185 

the  franchise,  to  which  is  added  the  value  of  the  real  and 
tangible  property,  known  as  the  "  abstract  value "  of  the 
road,  making  a  total  which  is  termed  the  entire  value  of 
the  railway  for  purposes  of  taxation.  This,  however,  is  not 
all ;  for  if  the  value  of  the  tangible  property  exceeds  the 
value  of  the  stock  and  debt,  the  board  declares  the  franchise 
to  be  twenty  per  cent  of  the  gross  earnings.  It  will  be 
readily  perceived  that  this  measurement  of  a  franchise,  which 
may  give  a  result  less  than  nothing,  is  rather  awkward. 
Indeed,  the  courts  of  New  Jersey  have  overturned  this 
portion  of  the  assessors'  standard  by  pronouncing  the  estimate 
based  on  gross  earnings  unconstitutional;1  but  the  main 
element  in  the  method  of  valuation  was  upheld  on  the  easy- 
going principle  that  no  substantial  injustice  was  done.  It  is 
this  absence  of  "  substantial  injustice  "  to  which  is  due  the 
chaotic  condition  of  franchise  taxation  in  this  country  to-day. 
In  Illinois  and  in  California,  the  method  of  taxing  fran- 
chises is  similar  to  that  of  New  Jersey.  In  Illinois,  the  board 
of  equalization  adds  the  cash  value  of  the  stock  to  that  of  the 
debt  (excluding  current  debt),  and  declares  the  result  to  be 
the  fair  cash  value  of  the  capital  stock  including  the  fran- 
rliise.  From  this  the  board  deducts  the  equalized  value  of 
all  the  tangible  property,  and  declares  the  remainder  to  be 
the  value  of  the  capital  stock  and  franchise  subject  to  taxa- 
tion. This  method  was  upheld  by  the  Supreme  Court  of  the 
tJnited  States  as  being  "  probably  as  fair  as  any  other." 2  In 
California,  the  value  of  the  franchise  is  determined  by  sub- 
tracting from  the  actual  value  of  the  capital  stock  the  value 
of  all  the  items  of  property.3  In  Kentucky,  the  assessors 
deduct  from  the  amount  of  the  capital  stock  the  assessed 
value  of  all  tangible  property  taxed  in  the  state,  and  declare 

1  Case  of  Railroad  Tax  Law,  N.  J.  Court  of  Errors  and  Appeals,  decided 
May  29,  1886.     The  case  may  be  found  in  full  in  the  Third  Annual  Report 
of  the  State  Board  of  Assessors,  1886,  pp.  79-173. 

2  State  Railroad  Tax  Cases,  2  Otto  575.      Cf.  Railway  vs.  Backus,  164 
U.  S.  421. 

8  Approved  in  Spring  Valley  Water  Works  vs.  Schottler,  62  Cal.  69,  118  ; 
Burke  vs.  Badlam,  67  Cal.  694  ;  San  Jos6  County  vs.  January,  57  Cal.  614. 


186  ESSAYS  IN  TAXATION- 

the  remainder  to  be  the  value  of  the  franchise.  In  the  case 
of  foreign  companies,  however,  they  take  that  proportion  of 
the  capital  that  the  gross  receipts  in  the  state  bear  to  the 
total  gross  receipts,  and  then  deduct  the  value  of  the  tan- 
gible property  assessed  in  the  state.  In  the  case  of  transpor- 
tation companies  they  take  only  that  proportion  of  the  capital 
stock  which  the  length  of  the  line  within  the  state  bears  to  the 
total  length.1  In  Indiana,  if  the  full  value  of  the  franchise  is 
represented  by  the  capital  stock,  the  franchise  is  taxed ;  but 
when  the  franchise  is  of  greater  value  than  the  capital  stock, 
then  it  is  provided  that  the  franchise  "  shall  be  assessed  at  its 
full  cash  value,"  and  the  capital  stock  shall  not  be  taxed.2  In 
the  other  states  the  determination  of  the  franchise  is  generally 
fixed  by  statute,  but  the  variety  of  methods  is  very  great. 

The  meaning  of  "franchise  tax"  is  thus  something  wholly 
indefinite.  What  is  called  a  franchise  tax  in  one  state  may 
be  absolutely  unlike  that  in  the  adjoining  state.  The  only 
course  open  for  us,  therefore,  is  to  discuss  the  principles 
underlying  corporate  taxation,  regardless  of  the  technical 
phraseology.  Before  proceeding  to  this  discussion,  however, 
there  still  remain  a  few  points  for  examination. 

What  is  the  real  significance  of  the  franchise  tax  ?  Why 
is  it  desirable  that  such  a  hard  and  fast  line  should  be  drawn 
between  the  property  tax  and  the  franchise  tax?  What  is 
the  meaning  of  the  distinction  ? 

The  answer  is  very  plain.  In  the  first  place,  according  to 
the  constitutions  of  several  of  the  states,  the  taxes  on  prop- 
erty must  be  uniform.  If,  however,  the  corporation  tax  is 
held  to  be  a  franchise  tax,  there  is  no  necessity  of  such 
uniformity  between  the  tax  on  individuals  and  that  on  cor- 
porations. Secondly,  according  to  the  principles  of  the 
property  tax,  deductions  are  allowed  for  certain  classes  of 
exempt  or  extra-territorial  property.  If  the  tax  is  a  fran- 
chise tax,  such  exemptions  cannot  be  claimed.  Thirdly,  if 
the  tax  is  a  franchise  tax,  and  not  a  tax  on  property  or 

1  Ky.  Laws  of  1892,  chap.  102,  art.  iii.,  §  3. 

2  Ind.  Law  of  Mar.  6,  1891,  §  74. 


THE  TAXATION  OF  CORPORATIONS  187 

earnings,  it  may  be  upheld  as  not  interfering  with  interstate 
commerce.  Finally,  if  the  tax  is  a  franchise  tax,  many  of 
the  objections  to  double  taxation  would  be  removed,  as  we 
shall  see  later  on.  Every  commonwealth  imposing  a  franchise 
tax,  for  instance,  could  assess  the  entire  capital  of  a  corpora- 
tion, although  only  a  very  small  portion  might  be  located  or 
employed  within  the  state.  We  can  hence  readily  under- 
stand the  persistence  with  which  the  corporations  seek  to 
uphold  the  distinction  and  to  have  the  charge  declared  to 
be  not  a  franchise,  but  a  property,  tax. 

The  question  has  arisen  almost  exclusively  in  connection 
with  the  taxation  of  deposits,  capital  stock  or  earnings.  In 
the  case  of  deposits  of  savings  banks  the  decisions  are  almost 
uniform  that  the  tax  is  one  on  the  franchise  and  not  on  the 
property  ; l  among  the  few  commonwealths  that  tax  such 
deposits,  Connecticut,  Maine,  Maryland  and  Massachusetts 
accept  this  view.  Moreover,  since  there  is  no  necessary 
relation  between  the  amount  of  the  deposits  and  the  extent 
of  the  property,  the  tax  is  valid  even  if  the  deposits  are  in- 
vested in  United  States  securities.  Only  one  commonwealth, 
New  Hampshire,  has  held  out  against  the  general  tendency 
and  pronounced  the  tax  on  deposits  to  be  a  property  tax.2 

In  the  case  of  capital  stock  the  matter  is  more  compli- 
cated and  the  decisions  are  more  divergent.  That  capital 
stock  is  in  one  sense  property  will  of  course  be  denied  by 
no  one  ;  but  whether  the  tax  on  capital  stock  is  tantamount 
to  a  tax  on  general  property  is  an  entirely  different  ques- 
tion. In  several  commonwealths  it  has  been  held  that  cap- 
ital stock  practically  represents  the  property,  and  that  the 
two  are  to  all  intents  and  purposes  interchangeable  terms.8 

1  Maryland  vs.  Central  Savings  Bank,  72  Md.  92 ;  Coite  vs.  Society  for 
Savings,  32  Conn.  173,  affirmed  in  6  Wall.  694 ;  Provident  Institution  vs. 
Massachusetts,  8  Wall.  611.    See  also  Commonwealth  vs.  Savings  Bank,  123 
Mass.  493  ;  Jones  vs.  Savings  Bank,  66  Me.  242. 

2  Bartlett  vs.  Carter,  69  N.  H.  105. 

8  Jones  vs.  Davis,  3  Ohio  474 ;  Burke  vs.  Badlam,  57  Cal.  694 ;  New  Or- 
leans vs.  Canal  Co.,  29  La.  A.  R.  851 ;  Whitney  vs.  Madison,  23  Ind.  331 ; 
County  Commissioners  vs.  National  Bank,  48  Md.  117. 


188  ESSAYS  IN  TAXATION 

As  regards  the  tax  on  capital  stock  in  general,  other  com- 
monwealths, however,  have  decided,  and  the  federal  courts 
have  affirmed  the  decision,  that  it  is  not  a  tax  on  the  prop- 
erty. Thus,  it  has  been  held  that  the  Delaware  railroad  tax 
of  one-quarter  of  one  per  cent  on  the  actual  cash  value  of 
the  capital  stock  is  a  tax  not  on  the  property  or  on  the 
shares  of  individuals,  but  on  the  corporation,  measured  by 
a  certain  percentage  on  the  value  of  its  shares.1  In  like 
manner  the  Massachusetts  taxes  on  the  whole  value  of 
the  corporate  shares  and  on  the  capital  stock  in  excess 
of  the  value  of  the  real  estate  and  machinery  have  been 
pronounced  taxes  on  the  franchise.2  In  a  recent  case  it  has 
been  held  that  this  tax,  although  nominally  upon  the  shares 
of  capital  stock,  is  in  effect  a  tax  upon  the  organization  on 
account  of  property  owned  or  used  by  it,  and  therefore  valid. 
It  is  an  excise  tax,  not  a  property  tax,  and  therefore  not  limited 
by  the  constitutional  restrictions  as  to  the  uniform  taxation 
of  all  property.3  On  the  other  hand  the  Connecticut  courts 
have  held  that  the  tax  on  capital  stock  and  debt  is  not  a 
tax  on  franchise,  but  on  property  ; 4  and  the  older  cases 
in  Alabama  and  Missouri  were  similarly  decided.5 

Secondly,  in  the  case  of  capital  stock  as  measured  by 
dividends,  the  courts  of  Pennsylvania  and  New  York  have 
arrived  at  diametrically  opposite  conclusions.  In  Pennsyl- 
vania a  long  series  of  cases  has  consistently  maintained  the 
doctrine  that  the  tax  is  one  on  property.6  The  court  has 
endeavored  to  lay  down  this  rule  :  — 

1  The  Delaware  Railroad  Tax  Case,  18  Wall.  206. 

2  Hamilton  Co.  vs.  Massachusetts,  6  Wall.  632  ;  Commonwealth  vs.  Ham- 
ilton Manufacturing  Co.,  94  Mass.  298 ;  Manufacturers'  Insurance  Co.  vs. 
Loud,  99  Mass.  146 ;  Portland  Bank  vs.  Apthorp,  12  Mass.  252  (1815),  the 
basis  of  all  subsequent  decisions. 

8  Western  Union  Telegraph  Co.  vs.  Massachusetts,  125  U.  S.  530. 

*  Nichols  vs.  Railroad  Co.,  42  Conn.  103. 

6  State  vs.  Insurance  Co.,  89  Ala.  335 ;  State  vs.  Railway  Co.,  37  Mo. 
265. 

6  Fox's  Appeal,  112  Pa.  359;  Commonwealth  vs.  Standard  Oil  Co.,  101 
Pa.  119 ;  Phoenix  Iron  Co.  vs.  Commonwealth,  59  Pa.  104  ;  Catawissa  Appeal, 
78  Pa.  59. 


THE  TAXATION"  OF  CORPORATION'S  189 

The  test  whether  the  tax  in  any  given  case  is  a  franchise  as 
distinguished  from  a  property  tax,  would  seem  to  be  that  a  tax 
according  to  a  valuation  is  a  tax  on  property,  whereas  a  tax  im- 
posed according  to  nominal  value  or  measured  by  some  standard 
of  mere  calculation  —  as  contrasted  with  valuation  —  fixed  by  the 
law  itself  may  be  a  franchise  tax.1 

The  New  York  and  New  Jersey  courts,  on  the  other 
hand,  have  held  the  tax  on  capital  stock  to  be  a  franchise 
tax.2  The  New  York  case  was  carried  in  last  instance  to 
the  federal  court.  Of  course  the  fact  that  the  statutes  of 
Massachusetts  and  New  York  expressly  declared  the  tax  to 
be  a  franchise  tax,  was  of  no  weight ;  for  it  was  justly 
contended  that  no  importance  should  attach  to  mere  nomen- 
clature. But  the  United  States  Supreme  Court  had  already 
shown  the  tendency  of  its  thought  in  the  Massachusetts  and 
Delaware  decisions  just  cited.  In  a  subsequent  case,  the  court 
said,  although  indeed  obiter,  that  the  New  York  tax  was 
"a  franchise  tax  in  the  nature  of  an  income  tax."3  Finally, 
in  a  later  case,  the  tax  was  definitely  pronounced  to  be  on 
franchise,  the  court  holding  that  the  tax  was  not  upon  the 
capital  stock  nor  upon  any  bonds  of  the  United  States  com- 
posing a  part  of  that  stock  ;  but  that  reference  was  made  to 
the  capital  stock  and  dividends  only  for  the  purpose  of  deter- 
mining the  amount  of  the  tax  to  be  exacted  each  year.4 

This  decision  may  be  defended  on  economic  as  well  as 
on  legal  grounds.  It  may  be  granted,  and  in  fact  it  is  diffi- 
cult to  dispute  the  contention,  that  the  tax  is  in  one  sense 
a  tax  on  capital  stock.  Nevertheless,  it  does  not  follow 
that  the  tax  is  a  property  tax  ;  for  from  the  economic 
point  of  view  capital  stock  is  not  necessarily  identical 
with  the  property  of  a  corporation.  In  the  first  place 
there  is  the  question  of  the  market  or  par  value 

1 101  Pa.  127. 

2  People  vs.  Home  Insurance  Co.,  92  N.  Y.  328 ;  Singer  Co.  vs.  Heppen- 
heimer,  25  Vroom  439. 

8  Or,  as  it  was  said  in  another  place,  "  a  tax  upon  its  franchise  based  upon 
its  income."  Mercantile  Bank  vs.  New  York,  121  U.  S.  158,  160. 

4  Home  Insurance  Co.  vs.  State  of  New  York,  134  U.  S.  594. 


190  ESSAYS  IN  TAXATION 

of  the   stock.     Some   of  the   commonwealths,  as  we  know, 
tax  corporations  on  the  amount,  i.e.  the  par  value,  of  the 
capital  stock.     Yet  manifestly,  where  the  market  value  of 
\    the  stock  may  be  double  or  half  the  par  value,  it  cannot 
J    be  maintained  that  the  latter  is  identical  with,  or  an  index 
|    to,  the  value  of  the  property.     In  no  sense,  therefore,  can 
I    capital  stock  at  its  par  value  be  declared  equivalent  to  the 
^  whole   property.     Even   if  we   take   the   market  value   of 
the  stock,  we  are  not  in  a  much  better  position,  for  many  of 
our  corporations,  especially  railroads,  are  created  from  the 
proceeds  of  the  bonds.     In  such  cases,  although  the  prop- 
erty may  be  great,  the  profits  are  devoted  mainly  to  meet- 
l   ing  the  interest  on  the  bonded  debt,  and  since  there  may  be 
\  no  dividends,  the  value  of  the  stock  may  be  very  slight.    Yet 
the  property  which  produces  these  profits  may  be  enormous. 
j  Evidently  the  capital  stock  and  the  whole  property  are  not 
I  identical.     But  we  may  go  still  farther.     Even  in  the  case  of 
/  corporations  without  a  bonded  debt,  but  whose  property  does 
not  pay  good  dividends,  the  capital  stock  at  its  market  value 
is  no  index  of  the  value  of  the  property.     Thus,  a  model- 
dwellings    company    may   have    property    worth  a  million 
dollars ;  yet  if   it  is  so  managed  as  to  pay  no  dividends, 
the   stock  will  sell   in   the  market  for  a   very  small   sum. 
The  value   of   this  depreciated  stock   is  evidently  not  the 
same  as   that  of  the  company's  real   property.     They   are 
not  interchangeable  terms.     Hence,  from  whatever  point  of 
view  we  regard  it,  capital  stock  is  not  identical,  economically 
speaking,  with  the  total  corporate  property  ;  a  tax  on  capital 
\     stock  is  not  a  tax  on  the  entire  property. 

The  courts  of  New  Jersey,  New  York  and  the  United  States 
are  then  perfectly  right  in  their  decisions ;  and  the  Pennsylva- 
nia cases  seem  to  be  incorrect  both  in  law  and  in  economics. 
The  third  case  in  which  the  question  of  a  franchise  tax 
is  of  importance  is  in  connection  with  the  subject  of 
interstate  commerce.  The  growth  of  the  interpretation  put 
upon  the  principle  that  no  state  may  levy  a  tax  interfering 
with  interstate  commerce  will  be  more  fully  discussed  here- 


THE  TAXATION-  OF  CORPORATIONS  191 

after.1  It  may  be  stated  here,  however,  that  in  a  large  number 
of  cases  it  has  been  held  that  a  tax  on  the  franchise  of  a 
domestic  corporation  is  perfectly  valid  even  though  the 
value  of  the  franchise  is  measured  by  the  gross  receipts, 
a  part  of  which  are  derived  from  interstate  commerce.2 
Were  the  tax  not  a  franchise  tax,  it  would  be  invalid  as 
a  tax  on  interstate  business. 

It  will  be  seen  from  the  above  review  that  the  entire 
treatment  of  a  franchise  tax  is  based  largely  on  a  legal 
fiction.  The  conception  is  legal,  not  economic.  It  was 
devised  by  the  legislatures  and  extended  by  the  courts 
in  order  to  evade  the  evil  results  of  the  general  prop- 
erty tax.8  It  is  remarkable  that  in  the  state  of  New 
York,  where  the  commonwealth  tax  on  capital  stock  is  held 
to  be  a  franchise  tax,  the  local  tax  on  capital  stock,  which 
is  levied  in  almost  the  identical  way,  is  held  to  be  a  property 
tax.  In  the  local  tax  a  deduction  must  be  allowed  for  any 
non-taxable  property  in  which  the  capital  may  be  invested ; 
in  the  state  tax  no  such  deduction  is  permitted.4  Such  a 
distinction  is  economically  incorrect.  Except  in  so  far  as 
corporations  may  be  made  to  pay  for  their  charters,  there  is 
no  reason  why  they  should  be  put  on  a  different  footing 
from  joint-stock  companies  or  other  associations.  The 
ability  of  an  association  to  pay  —  its  earning  power  —  is  not 
changed  a  whit  by  the  simple  fact  of  incorporation.  The 

1  Infra,  pp.  206-212. 

2  State  Tax  on  Railway  Gross  Receipts,  15  Wall.  284 ;  Maine  vs.  Grand 
Trunk  R.  R.  Co.,  142  U.  S.  217 ;  People  vs.  Wemple,  117  N.  Y.  136,  and 
other  cases  cited  below. 

8  This  is  apparent  from  the  New  York  law  of  1866,  chap.  761,  which 
declared  the  privileges  and  franchises  of  savings  banks  to  be  personal  prop- 
erty, and  taxable  to  an  amount  not  exceeding  the  gross  sum  of  the  surplus 
earned.  In  Monroe  County  Savings  Bank  vs.  City  of  Rochester,  37  N.  Y. 
365,  the  law  was  upheld,  although  the  bank  had  a  portion  of  its  property 
invested  in  United  States  bonds.  The  court  held  that  since  the  tax  was 
upon  franchise  it  was  unimportant  in  what  manner  the  property  of  the  cor- 
poration was  invested.  "  The  reference  to  property  is  made  only  to  ascer- 
tain the  value  of  the  thing  assessed." 

4  People  vs.  Barker,  139  N.  Y.  55 ;  People  vs.  Commissioners,  72  Hun 
126  ;  People  vs.  Coleman,  126  N.  Y.  433. 


192  ESS  A  YS  IN  TAXATION. 

privilege  of  limited  liability,  however  important  it  may  be 
to  the  individual  stockholders,  and  however  great  the  amount 
that  may  be  demanded  for  the  privilege  as  a  condition  pre- 
cedent to  organization,  does  not  alter  the  taxable  capacity 
of  the  association  after  it  has  once  become  a  corporation. 
If  the  corporate  franchise,  in  the  sense  of  the  privilege  of 
being  a  corporation,  itself  constituted  the  only  justification 
of  a  tax,  how  would  it  then  be  possible  to  tax  unincorporated 
companies  in  the  same  way?  And  yet  to  exempt  the  latter 
would  clearly  constitute  a  glaring  economic  inequality. 

The  value  of  the  franchise  from  the  economic  point  of 
view  consists  in  the  earning  capacity  of  the  corporation. 
That  is  the  real  basis  of  all  taxation  and  can  best  be  gauged 
by  the  amount  of  business  done.  It  will  be  remembered  that 
the  court  says  :  "  Whether  the  tax  upon  a  domestic  corpora- 
tion be  called  a  tax  upon  franchise  or  upon  business  is 
wholly  unimportant."1  We  may  go  farther  and  say  that 
from  the  economic  standpoint  it  is  wholly  immaterial  whether 
the  tax  upon  any  corporation  be  called  a  tax  on  franchise  or  a 
tax  on  business.  In  an  economic  sense  the  franchise  tax  means 
nothing  at  all.  It  is  so  utterly  indefinite  that  it  defies  exact 
analysis.  However  valuable  it  may  be  to  the  lawyer  in  the 
effort  to  evade  certain  constitutional  restrictions,  to  the 
student  of  the  science  of  finance  it  is  a  useless  conception. 

* 

II.    Economic  Theory. 

Let  us  therefore  leave  the  domain  of  these  legal  quibbles 
and  attempt  to  analyze  the  economic  principles  underlying 
the  taxes  actually  in  vogue,  irrespective  of  the  question 
whether  they  are  called  franchise  taxes.  It  will  be  best  to 
take  them  up  in  the  order  mentioned  above.2 

First,  the  general  property  tax,  or  the  taxation  of  the 
corporate  realty  plus  its  visible  and  invisible  personalty  at 
its  actual  value.  It  will  not  be  necessary  to  show  the  in- 
adequacy of  this  primitive  plan ;  all  the  actual  reforms  are 
moving  away  from  it.  We  have  seen  in  a  previous  chapter 

i  96  N.  Y.  396.  »  Supra,  pp.  177-179. 


THE  TAXATION  OF  CORPORATION'S  193 

that  the  standard  of  taxation  is  ability  to  pay,  and  that 
this  ability  is  no  longer  proportional  to  the  general  mass  of 
property.     The  general  property  tax  is  to-day  antiquated. 
When  as  a  state  tax  it  is  levied  by  the  local  assessors,  it  ' 
becomes  especially  unjust ;  and  even  when  assessed  by  a  sepa-  Sr 
rate  state  board  it  is  inexact,  and  exhibits  all  the  defects  of    I 
the  general  property  tax  on  individuals.     We  may  conclude,      ] 
therefore,  with  the  railroad  tax  commission  of  1879,  that  as 
a  system  it  is  open  to  almost  every  conceivable  objection.1 

The  cost  of  the  property,  as  a  basis  for  taxation,  is  even 
less  defensible  than  the  value  of  the  property.  For  no  one 
would  assert  that  the  original  cost  of  corporate  property 
bears  any  necessary  relation  to  the  present  value,  much  less 
to  its  present  earning  capacity.  This  method  is  so  obviously 
unjust  as  to  deserve  no  further  mention. 

The  capital  stock  at  its  market  value.  This  plan  is  open  to 
several  vital  objections.  The  idea  is  that  the  market  value 
of  the  stock  will  be  practically  equivalent  to  the  value  of  the 
property,  or,  as  it  is  put  by  some  of  our  state  courts,  that 
the  entire  property  of  a  corporation  is  identical  with  its 
stock.  As  has  already  been  observed,  heavily  bonded  corpo- 
rations would  in  this  way  entirely  escape  taxation ;  because 
in  such  cases  —  and  they  are  the  great  majority — the  capital 
stock  alone  would  not  represent  the  value  of  the  property. 
Secondly,  even  in  the  case  of  corporations  without  any 
bonded  debt,  the  tax  is  unjust,  because  it  does  not  neces- 
sarily bear  any  relation  to  the  earning  capacity.  If  a  com-  \^ 
pany  without  bonded  debt  pays  dividends,  the  value  of  the 
stock  is  indeed  a  fair  index  to  earning  capacity ;  its  value 
would  represent  the  capitalized  earnings.  But  if  there 
are  no  dividends,  ihe  value  of  the  capital  stock  is  wholly 
uncertain  and  largely  speculative,  depending  on  the  manip- 
ulations of  the  stock  exchange.  It  frequently  happens  that 
non-dividend-paying  stock  fluctuates  in  value  from  thirty  to 
fifty  per  cent  within  one  year.  A  standard  of  taxation  which 

1  Taxation  of  Railroads  and  Eailroad  Securities,  by  C.  F.  Adams,  W.  B. 
Williams  and  J.  H.  Oberly  (1880),  p.  8. 
o 


194  ESSAYS  IN  TAXATION 

in  such  large  classes  of  cases  bears  no  proportion  to  the  earn- 
ing capacity  or  productiveness  of  the  property  clearly  cannot 
be  successfully  defended.  We  can  again  agree  with  the  rail- 
road tax  commission  in  their  conclusion  that  the  tax  on  the 
value  of  the  capital  stock  is  "  clumsy  and  devoid  of  scientific 
merit,"  that  it  "  would  admit  of  evasions  in  a  most  obvious 
way,"  and  that  "  it  is  impossible  of  any  general  application."  1 

The  New  York  statute  which  governs  the  taxation  of  cor- 
porations for  local  purposes  requires  the  capital  stock  to  be 
assessed  "at  its  actual  value  in  cash."  In  determining  the 
"actual"  value,  the  assessors  may  take  "book  value,"  i.e.  a 
value  obtained  by  estimating  the  assets  separately  and 
deducting  from  the  aggregate  the  total  amount  of  the  liabili- 
ties, actual  or  contingent.2  The  latter  method  is  employed 
when  the  market  value  of  the  stock  is  fictitious  or  artificially 
inflated,  but  in  principle  is  open  to  precisely  the  same  criti- 
cism as  the  other  method.  In  fact,  the  objections  are  rather 
stronger  ;  for,  whereas  in  the  case  of  the  tax  on  capital  stock 
according  to  market  value  the  bonded  indebtedness  is  not 
taxed  at  all,  in  this  case  the  bonded  indebtedness  is  actu- 
ally deducted.  Under  the  New  York  law  it  has  been  recently 
decided  that  "  capital  stock  "  does  not  necessarily  mean  share 
stock,  but  the  capital  owned,  the  fund  required  to  be  paid 
in  and  kept  intact  as  the  basis  of  the  business  enterprise. 
When  the  capital  is  undisclosed,  the  assessor  may  consider 
the  market  value  of  the  shares  as  an  aid  in  discovering  the 
capital,  but  not  as  the  thing  to  be  valued  and  assessed.  3 

The  capital  stock  at  its  par  value.  This  method  is  open  to 
all  the  objections  of  the  preceding  and  to  many  more  in 
addition.  Moreover,  it  is  peculiarly  liable  to  evasion.  For 
example,  in  New  York  it  is  a  common  practice  for  corpora- 
tions to  evade  the  organization  tax  by  issuing  a  nominally 

1  Beport,  etc.,  p.  7.  Cf.  the  Report  on  the  Valuation  and  Taxation  of 
Railroads,  to  the  Pennsylvania  Tax  Conference,  1894,  written  by  Mr. 
Joseph  D.  Weeks.  2  107  N.  Y.  541. 

8  People  vs.  Coleman,  126  N.  Y.  433,  distinguishing  many  preceding  cases. 
See  also  People  vs.  Commissioners,  72  Hun  126  (1894). 


THE  TAXATION  OF  CORPORATIONS  195 

small  capital,  but  selling  it  to  the  stockholders  at  a  premium 
of  several  hundred  per  cent ;  the  market  value  of  the  stock 
is  thus  at  once  many  times  the  par  value.  The  sole  recom- 
mendation of  this  plan  is  the  facility  of  fixing  a  basis  for 
assessment ;  but  this  does  not  compensate  for  its  obvious 
defects.  The  par  value  of  stock  is  certainly  no  gauge  either 
of  the  real  worth  of  the  property  or  of  its  earning  capacity. 
This  is  perhaps  the  least  defensible  of  all  the  methods. 

The  capital  stock  plus  the  bonded  debt  at  the  market  value. 
The  justification  for  adding  to  the  value  of  the  stock  the 
value  of  what  the  company  owes,  in  the  shape  of  its  funded 
debt,  is  the  simple  fact  that  the  existence  of  this  in- 
debtedness makes  the  stock  worth  just  so  much  less.  The 
sum  of  the  two  elements  is  a  far  better  index  to  the  value  of 
the  property  than  the  capital  stock  alone.  This  method  is 
much  preferable  to  any  that  has  yet  been  discussed,  because 
it  prevents  the  exemption  of  heavily  bonded  companies; 
and  yet  it  is  not  entirely  free  from  objections.  Owing  to 
the  complications  of  interstate  polity,  the  proceeds  of  the 
tax,  in  all  cases  where  the  stock  and  bonds  of  a  corporation 
are  owned  outside  of  the  commonwealth,  will  accrue  not  to 
the  state  of  the  owner's  residence,  but  to  the  state  where 
the  corporate  property  is  situated.  Secondly,  when  the  tax 
is  on  bonds  as  well  as  on  stock  it  will  be  inadequate,  because 
applicable  only  to  the  bonds  owned  by  residents  of  the  state.  \ 
If  the  tax  is,  however,  levied  not  on  the  bonds,  but  on  a  valua-  > 
tion  equal  to  the  stock  plus  bonds,  this  objection  may  be  obvi-  \ 
ated.  Both  these  points  will  be  discussed  more  fully  below. 
Thirdly  and  principally,  in  all  those  cases  where  the  corpo- 
ration pays  no  dividends  and  its  stock  nevertheless  possesses 
a  speculative  value,  the  tax,  for  the  reasons  adduced  above, 
will  not  necessarily  bear  any  relation  to  the  earning  capacity 
of  the  company.  In  short,  while  this  method  is  far  better 
than  the  taxation  of  capital  stock,  it  does  not  avoid  all  the 
objections  that  have  been  urged  against  the  latter. 

There  remain  thus  only  the  taxes  on  earnings,  on  busi- 
ness, on  dividends  and  on  profits. 


196  ESSAYS  IN  TAXATION 

The.  gross  earnings.  This  tax  was  the  one  recommended 
by  the  railroad  tax  commission.  It  possesses  many  unde- 
niable advantages.  It  is  certain,  easily  ascertained  and  not 
susceptible  of  evasion.  But  it  has  one  fatal  defect ;  —  it  is 
not  proportional  to  the  real  earning  capacity,  it  takes  no  ac- 
count of  the  original  cost,  nor  does  it  pay  any  regard  to  the 
current  expenses,  which  may  be  necessary  and  just.  For  ex- 
ample, when  the  cost  of  building  a  railroad  is  great,  its  gross 
earnings  must  be  correspondingly  large  in  order  to  enable  its 
owners  to  realize  any  fair  return  on  the  investment.  A  tax 
on  gross  earnings  does  not  recognize  this  distinction.  It 
discriminates  unfairly  between  companies,  and  makes  a  line 
built  at  great  expense  and  with  great  risk  pay  a  penalty  for 
the  enterprise  of  its  constructors.  Again,  a  gross  earnings 
tax  takes  no  account  of  expenses.  Of  two  corporations 
which  have  equally  large  gross  receipts,  one  may  be  in  a 
naturally  disadvantageous  position  which  unduly  increases 
the  cost  of  operation  or  management.  Clearly  its  ability  to 
pay  is  not  so  great  as  that  of  its  rival  in  possession  of  natural 
advantages.  In  short,  the  gross  receipts  tax  is  like  the  old 
tithe,  the  most  primitive  of  all  land  taxes. 

These  defects  in  the  proportional  earnings  tax  are  so  ap- 
parent that  several  commonwealths,  as  we  know,  have  intro- 
duced, in  the  case  of  railroads  at  least,  the  graded  gross 
earnings  tax,  the  rate  per  cent  increasing  with  the  earnings. 
But  this  system  removes  the  objection  only  in  part,  for  the 
graduation  takes  place  only  up  to  a  certain  point.  Above 
all,  there  is  no  guarantee  that  the  increase  of  net  receipts 
will  correspond  to  the  increase  of  the  gross  receipts.  There 
is  no  necessary  connection  between  them.  A  corporation 
with  gross  receipts  of  five  thousand  dollars  per  mile  may 
have  actually  less  net  receipts  than  one  with  four  thousand 
dollars  per  mile.  In  such  a  case  a  graded  earnings  tax 
would  intensify  the  disadvantages  of  the  first  line  and 
augment  the  injustice.  To  tax  gross  earnings  is,  therefore, 
essentially  a  slip-shod  method. 

The   business   transacted.     This  tax,  while   closely   anal- 


THE  TAXATION  OF  CORPORATIONS  197 

ogous  to  the  gross  earnings  tax,  does  not  possess  all  its 
advantages.  The  business  may  be  large  but  not  lucrative. 
An  extensive  business  does  not  mean  even  proportionally 
extensive  gross  earnings.  The  business  transacted  is  an 
exceedingly  rough  way  of  ascertaining  the  prosperity  of  a 
corporation.  It  affords  no  accurate  test  of  proftts,  and  fails 
to  take  account  of  the  personal  equation  which  may  make  all 
the  difference  between  good  and  bad  management.  Clearly, 
the  tax  on  business  is  but  a  clumsy  device. 

The  dividends  or  the  capital  stock  according  to  dividends. 
Economically  speaking  these  taxes  are  the  sam«  ;  but  from 
the  legal  point  of  view,  at  least  according  to  the  opinion  of 
the  Supreme  Court,  there  is  a  decided  difference.  The  dis- 
tinction is  brought  out  in  connection  with  the  subject  of 
extraterritoriality,  and  will  be  fully  discussed  below.  We 
are  here  dealing  only  with  the  economic  problem. 

The  dividends  tax,  it  may  be  said,  is  good  so  far  as  it  goes; 
but  it  does  not  go  far  enough.  It  is  indeed  true  that  some 
of  the  objections  are  slight.  Thus  it  has  been  contended  that 
this  tax  fails  to  reach  the  profits  which  are  not  divided  but 
which  are  simply  put  into  a  reserve  fund ;  and  some  com- 
monwealths have  even  sought  to  obviate  the  supposed  diffi- 
culty by  providing  that  the  tax  should  apply  to  the  dividends, 
whether  declared  or  merely  earned  and  not  divided.  This 
objection,  however,  is  not  of  great  importance ;  for  even  if 
the  undivided  earnings  are  not  taxed,  they  go  into  the  reserve 
or  surplus  fund ;  and  as  this  increases  the  corporate  capital, 
it  must  in  the  long  run  lead  to  increased  earnings  on  the 
larger  capital.  Since  the  surplus  cannot  be  increased  indef- 
initely, it  will  ultimately  find  its  way  to  the  shareholders  as 
dividends,  and  thus  become  liable  to  the  tax. 

Another  objection  which  might  be  urged  is  that  a  cor- 
poration may  devote  a  portion  of  its  earnings  to  new  con- 
struction or  to  new  equipment.  This  expense  may  be 
defrayed  out  of  profits,  instead  of  from  the  capital  or  con- 
struction fund.  The  dividends  in  such  a  case,  it  might  be 
said,  do  not  represent  the  actual  earning  capacity  of  the  enter- 


188  ESSAYS  IN  TAXATION" 

prise.  While  this  is  true  temporarily,  the  improvements  made 
by  the  corporation  necessarily  enhance  the  value  of  the  prop- 
erty and  ultimately  lead  to  increased  dividends,  so  that  in  the 
long  run  a  tax  on  dividends  would  still  reach  the  corporation. 

The  real  objection  to  the  dividends  tax  is  of  quite  a  dif- 
ferent character.  It  is  utterly  inadequate  when  applied  to 
those  corporations  which  have  bonded  indebtedness.  Thus 
one  corporation  having  no  bonds  may  earn  enough  to  pay 
dividends  of  five  per  cent  on  its  stock,  while  another,  with 
the  same  earnings,  may  have  devoted  half  to  the  payment  of 
interest  on  bonds,  and  only  half  to  the  payment  of  dividends. 
A  tax  on  dividends,  while  nominally  just,  would  be  actually 
most  unjust,  for  one  corporation  would  pay  just  twice  as 
much  as  the  other.  The  objection  has  been  recognized  in 
American  legislation,  but  only  once.  The  United  States 
internal  revenue  law  of  1864  provided  for  a  five  per  cent 
tax  (raised  from  three  per  cent  in  1862),  which,  in  the  case 
of  railroads,  canals,  turnpike,  navigation  and  slackwater 
companies,  was  imposed  on  all  dividends,  as  well  as  on 
all  coupons  or  on  all  interest,  on  evidences  of  indebted- 
ness and  on  all  profits  carried  to  the  account  of  any  fund. 
In  the  case  of  those  companies  which  were  not  pre- 
sumed to  have  any  bonded  debt,  like  banks,  trust  com- 
panies, savings  institutions  and  insurance  companies,  the 
tax  was  imposed  only  on  dividends  and  surplus.  The 
federal  law,  indeed,  violated  strict  consistency  in  impos- 
ing a  gross  earnings  tax  also  on  transportation  and  on  certain 
insurance  companies ;  but  the  correct  implication  in  the 
law  was  the  inadequacy  of  a  tax  on  dividends  alone.  In 
fact,  the  objections  to  the  dividends  tax  are  closely  analogous 
to  those  which  we  found  in  the  capital  stock  tax  as  compared 
with  the  tax  on  stock  plus  debt.  Its  great  defect  is  that  it 
reaches  only  a  part  of  the  corporate  earning  capacity. 

We  thus  come  finally  to  the  tax  on  net  earnings,  or  rather 
on  net  receipts,  profits  or  income.  This  is  the  most  logical 
form  of  corporate  taxation.  The  tax  is  not,  like  the  gross 
earnings  tax,  unequal  in  its  operation.  It  holds  out  no 


THE  TAXATION"  OF  CORPORATION'S  199 

inducement,  like  the  general  property  tax,  to  check  improve- 
ments. It  is  just;  it  is  simple;  it  is  perfectly  proportional  to 
productive  capacity.  In  short,  it  satisfies  the  requirements 
of  a  scientific  system. 

There  are  two  possible  objections  to  a  tax  on  net  receipts. 
One  is  that  the  accounts  may  be  "  cooked "  by  paying 
unduly  large  salaries  to  the  officers  ;  that  is,  the  profits 
may  be  divided  as  nominal  expenses,  thereby  leaving  very 
insignificant  net  receipts  or  none  at  all.  This  objection, 
however,  would  not  apply  at  all  to  the  vast  majority  of 
corporations,  whose  stock  or  bonds  are  held  by  outside 
parties,  who  will  not  consent  to  see  their  dividends  or 
interest  curtailed  by  any  practices  of  this  nature.  The 
danger  can  be  real  only  in  respect  to  the  few  corporations 
in  which  the  stock  is  owned  entirely  by  the  managers. 
But  these  are  chiefly  manufacturing  corporations,  which,  as 
we  know,  are  usually  exempted  from  the  general  corporation 
tax.  Even  here,  however,  the  danger  is  not  very  great. 
We  hear  of  no  complaints  on  this  score  in  the  American 
commonwealths  where  the  net  receipts  tax  prevails ;  and 
in  Europe,  where  this  method  of  taxation  is  well-nigh  uni- 
versal, the  objection  has  never  been  raised.  It  may  thus  be 
pronounced  of  little  importance. 

Secondly,  it  may  be  contended  that  the  tax  is  imprac- 
ticable in  the  case  of  great  railroad  corporations  which, 
having  leased  lines  in  other  states,  are  interested  in  so 
manipulating  the  traffic  that  the  heavily  mortgaged  leased 
lines  will  earn  little  or  nothing  above  fixed  charges.  Such 
cases  are  very  common.  The  commonwealths  hi  which 
such  leased  lines  are  situated  will,  it  is  argued,  be  robbed 
of  the  whole  benefit  of  the  tax ;  since  the  proceeds  accrue 
to  the  state  of  the  parent  company.  In  reality,  this 
objection  arises  simply  from  a  quibble  about  words.  Of 
course  net  receipts  must  be  strictly  defined.  The  logical  \ 
basis  of  corporate  taxation  is  the  total  annual  revenue  from  •** 
all  sources  minus  all  actual  expenditures  except  interest 
and  taxes.  The  reason  for  not  deducting  fixed  charges,  i.e. 


200  ESSAYS  IN  TAXATION 

interest  on  the  bonds,  is  the  same  as  that  which  leads  some 
of  the  states  to  levy  the  railroad  tax  on  capital  plus  debt, 
and  which  made  the  federal  government  tax  coupons  as  well 
as  dividends.  Both  together  represent  earning  capacity. 
Although  the  interest  on  the  funded  debt  is  known  by  the 
name  of  fixed  charges,  it  is  really  part  of  the  profits  which, 
in  the  absence  of  funded  debt,  would  go  to  the  shareholders 
as  dividends.  It  would  obviously  be  suicidal  so  to  frame 
the  definition  of  net  receipts  as  to  exclude  this  interest  on 
bonds.  Net  receipts  of  a  corporation  mean  gross  receipts 
minus  actuaTcurrent  expenses.  Any  other  definition  would 
confuse  the  whole  conception. 

In  several  commonwealths  some  very  dubious  and 
arbitrary  distinctions  have  been  attempted.  The  Minne- 
sota courts  have  held  that  "  earnings "  means  only  re- 
ceipts from  operation.1  Under  the  New  York  law  it  has 
been  held  that  "  income "  means  gross  income,  and  that 
"  profits "  means  gross  profits,  not  clear  profits  ; 2  but  this 
decision  was  owing  to  some  peculiarities  of  the  statutory 
phraseology.  From  the  standpoint  of  the  science  of  finance 
we  understand  by  "income,"  net  income,  and  by  "profits," 
only  net 'profits.  So  in  Pennsylvania  and  Alabama  it  has 
been  held  that  income,  gains  or  net  earnings  means  the  whole 
product  of  the  business,  deducting  nothing  but  expenses.3 
The  Thurman  law,  indeed,  which  regulates  the  relations 
of  the  federal  government  to  the  Pacific  railroads,  defines 
net  earnings  in  a  different  way,  viz.,  as  the  gross  earnings, 
deducting  "  the  necessary  expenses  actually  paid  within 
the  year  in  operating  the  lines  and  keeping  the  same  in  a 
state  of  repair,"  and  also  deducting  "  the  sums  paid  by 
them  in  discharge  of  interest  on  their  first  mortgage 
bonds,"  but  "excluding  all  sums  paid  for  interest  on  any 

1  State  vs.  Railroad  Co.,  30  Minn.  311. 

2  People  vs.  Supervisors  of  Niagara,  4  Hill.  20  ;  People  vs.  Supervisors  of 
New  York,  18  Wend.  605. 

8  Commonwealth  vs.  Pa.  Gas  Coal  Co.,  62  Pa.  241  (1869)  ;  Board  of  Rev- 
enue vs.  Gas  Light  Co.,  64  Ala.  269.  In  the  case  of  mines,  "  net  proceeds  " 
have  been  defined ;  Montana  Code,  §  1791. 


THE  TAXATION  OF  CORPORATIONS  201 

other  portion  of  their  indebtedness."1  The  explanation  of 
this  arbitrary  definition  lies  not  in  any  economic  principle  but 
in  a  particular  legislative  provision  whereby  the  first  mortgage 
bonds  are  given  precedence  over  the  government  liens.  The 
Supreme  Court  has  held  that  "  net  earnings "  as  here  used 
exclude  expenditures  for  new  construction  and  new  equip- 
ment.3 The  Interstate  Commerce  Commission  makes  a  dis- 
tinction between  earnings  and  income,  including  in  earnings 
only  receipts  from  transportation,  and  designating  as  income 
the  receipts  from  property  owned  but  not  operated.  The 
aggregate  it  calls  total  earnings  and  income.3  While  this 
separation  of  earnings  is  correct,  the  nomenclature  is  on  the 
whole  confusing,  since  the  term  income  should  be  reserved 
for  the  conception  net  profits.  In  Virginia  the  net  income  of 
corporations  is  ascertained  by  "  deducting  from  gross  re- 
ceipts the  costs  of  operation,  repairs,  and  interest  on  indebt- 
edness." So  also  by  the  federal  law  of  1894  the  income  tax 
was  levied  only  on  corporate  dividends  ;  but  this,  as  we 
have  seen,  is  economically  incorrect.  Interest  on  bonds 
should  not  be  exempted. 

If  it  be  desired  to  obtain  in  the  case  of  railroad  com- 
panies a  more  exact  definition  of  net  receipts  or  income,  the 
following  would  be  a  sound  method  of  procedure :  Gross 
receipts  consist  of  all  earnings  from  transportation  of 
freight  and  passengers,  receipts  from  bonds  and  stocks  owned, 
rents  of  property  and  all  miscellaneous  receipts  from  ancillary 
business  enterprises  or  otherwise.  From  these  aggregate 
gross  receipts  we  should  deduct  what  are  classified  by  the 
Interstate  Commerce  Commission  as  operating  expenses, 
that  is,  expenses  for  conducting  transportation,  for  main- 
tenance of  roadway,  structures  and  equipment,  and  for  gen- 
eral expenses  of  management.  No  deduction  should  be  made 
for  fixed  charges,  i.e.  for  taxes  or  for  interest  on  the  debt, 

1  Act  of  May  7,  1878,  45th  Cong.,  2d  Sess.,  chap.  96,  sec.  1. 
2  Union  Pacific  R.  R.  Co.  vs.  United  States,  99  U.  S.  419. 
8  Eeport  on  the  Statistics  of  Railways  in  the  U.  S.  to  the  Interstate  Com- 
merce Commission,  1889. 


202  ESS AyS  IN  TAXATION 

or  for  the  amount  used  in  new  construction,  in  betterments, 
in  investments,  in  new  equipment,  or  for  any  of  the  expendi- 
tures that  find  their  way  into  profit  and  loss  account. 

The  method  here  suggested  would  lead  to  the  abolition 
of  one  of  the  serious  abuses  of  American  railway  manage- 
ment—  that  of  putting  all  possible  expenses  into  the  con- 
struction account.  The  railways,  for  example,  frequently 
fail  to  charge  the  maintenance  and  repair  of  their  rolling 
stock  to  current  expenses.  When  the  equipment  has  become 
unserviceable,  new  stock  is  bought  and  charged  to  the  con- 
struction or  to  the  profit  and  loss  account.  In  the  mean- 
time the  nominal  earnings  of  the  railway  seem  large,  and  the 
managers  reap  whatever  temporary  benefit  they  may  desire. 
The  taxation  of  net  profit  in  the  sense  that  has  been  indicated 
would  tend  to  check  this  practice,  since  deductions  would  be 
allowed  for  maintenance,  but  not  for  new  equipment.  A 
tax  on  net  receipts,  thus,  would  possess  not  only  a  financial, 
but  also  a  wider  economic  advantage. 

European  experience  all  points  to  taxation  of  net  earnings 
as  the  best  system.  One  country,  indeed,  still  assesses  cor- 
porate property  in  some  form  or  other.  Switzerland,  as  we 
have  seen,  is  the  only  European  state  which  has  retained 
the  mediaeval  system,  once  common  to  all  countries.  The 
reasons,  as  was  pointed  out,  are  the  comparative  equality 
of  conditions  and  the  survival  of  the  primitive  villages 
and  agricultural  communities  with  their  placid  and  homo- 
geneous economic  life.  It  is  significant,  however,  that  many 
of  the  Swiss  commonwealths,  in  which  we  notice  a  gradual 
industrial  development  and  a  consequent  differentiation  of 
property,  have  attempted  to  remedy  some  of  the  obvious 
defects  of  the  general  property  tax  by  supplementing  it 
with  an  income  tax.  Thus  some  cantons,  like  Schaff- 
hausen,  Zurich,  Basel,  Aargau  and  others,  tax  corporations 
on  their  capital  or  their  reserve  fund ;  or,  if  the  net  receipts 
exceed  a  certain  percentage  of  the  capital,  on  their  income. 
This  system  resembles,  although  in  a  very  slight  degree, 
those  of  New  York  and  Pennsylvania.  Other  cantons,  like 


THE  TAXATION  OF  CORPORATIONS  203 

Bern,  have  abandoned  the  general  property  tax,  and  assess 
corporations  only  on  their  real  estate  and  their  income. 
Finally,  some  cantons,  like  St.  Gall  and  Neuch&tel,  tax  cor- 
porations directly  only  on  their  income.  Even  in  Switzer- 
land, with  its  fondness  for  mediaeval  customs,  we  see,  there- 
fore, that  the  tendency  is  almost  everywhere  away  from  the 
taxation  of  corporate  property.  In  the  other  European 
states  this  tendency  has  passed  into  accomplished  fact. 

In  England,  all  corporations  are  held  to  be  "  persons  " 
within  schedule  D  of  the  income  tax,  and  consequently  they 
pay  a  tax  on  their  net  annual  profits  or  gains.  A  series  of 
important  cases  has  elaborated  the  principles  that  should 
determine  the  exact  nature  of  net  profits.1  The  rules  laid 
down  are  analogous  to  those  described  in  the  definition  of 
net  receipts  just  given.  The  tax,  moreover,  is  paid  before 
the  dividends  are  declared.  Railroads  are  also  subject  to 
the  special  passenger  duty  of  five  per  cent  on  receipts  from 
passengers,  which  is  merely  a  survival  of  the  old  tax  on 
stage  coaches,  and  to  a  corporation  duty,  which  is  intended 
to  take  the  place  of  the  "  death  duties  "  on  individuals. 

In  France,  all  corporations  pay  a  tax  on  net  profits  in  the 
shape  of  a  three  per  cent  tax  on  dividends,  coupons  and 
profits,  known  as  the  tax  "  sur  le  revenu  des  valeurs  mobi- 
lieres."  The  tax  is  also  applicable  to  joint-stock  companies 
and  to  commercial  enterprises,2  while  mutual  insurance  com- 
panies and  similar  associations  have  by  judicial  interpreta- 
tion been  exempted.  Like  individuals,  corporations  are  also 
subject  to  real  estate  taxes  and  to  the  license  taxes  (impdts  des 
patentes')  on  occupations.  In  the  case  of  railroads,  however, 
we  still  find  a  partial  tax  on  gross  receipts.  The  five  per 
cent  tax  on  gross  receipts  from  freight,  which  was  imposed 

1  Ellis,  A  Guide  to  the  Income  Tax  Acts,  2d  edition,  pp.  80,  92-101. 

2  The  tax  is  imposed  on  "  les  intfirets,  dividendes,  revenus  et  tous  autres 
produits  des  actions  de  toute  nature  "  of  stock  companies,  and  on  "  les  in- 
tfirets,  produits  et  bfinfifices  annuelles  des  parts  d'interet  et  commandites  " 
of  all  associations,  etc.,  without  a  divisible  share  capital.     Law  of  June  29, 
1872,  art.  1.     Cf.  Tanquerey,  Traite  theorique  et  pratique  de  Vlmpot  sur  le 
Sevenu  des  Valeurs  Mobilieres,  pp.  23,  51,  143,  etc. 


204  ESSAYS  AF  TAXATION 

after  the  Franco-Prussian  war,  proved  to  be  so  vexatious 
and  so  obstructive  to  industrial  development  that  it  was 
abolished  a  few  years  later.1  But  the  old  "tax  on  pub- 
lic conveyances  "  —  a  percentage  on  the  fare  — ,  which  dates 
from  the  last  century,  was  extended  in  1855  to  the  receipts 
from  passengers  and  from  express  traffic.  In  practice, 
this  "public  conveyance"  or  transportation  tax2  is  not 
a  direct  tax  on  the  corporations,  but  an  indirect  tax  on 
passengers  and  on  consignors  of  express  packages  ;  for  the 
tax  is  added  to  the  price  of  the  ticket  or  receipt  and  is  paid 
by  the  individual.  The  only  direct  tax  is  thus  laid  on  net 
earnings.  Corporations  also  pay  the  indirect  taxes,  like  the 
stamp  tax  (droit  de  timbre)  and  the  transfer  tax  (droit  de 
transmission)  on  shares  and  bonds  ;  but,  simply  to  facilitate 
the  administrative  procedure,  they  may  and  generally  do 
commute  for  these  by  paying  an  annual  tax  of  one-twentieth 
and  one-fifth  of  one  per  cent  respectively  on  the  amount  of 
their  capital  stock. 

In  Italy  corporations  are  taxed  on  their  income  or  net 
earnings  just  like  individuals,  by  the  imposta  sui  redditi 
delta  ricchezza  mobile.  This  "revenue  of  personal  property," 
as  it  is  called,  is  declared  to  consist,  so  far  as  corporations 
are  concerned,  in  "all  interest  or  dividends  paid."3  To 
make  the  term  dividends  still  clearer,  the  law  provides  that 
"in  the  estimate  of  income  are  included  all  sums,  under 
whatsoever  title,  distributed  among  the  shareholders  or 
added  to  capital,  surplus  or  sinking  fund  or  otherwise  used 
in  cancelling  debts."4  The  Italian  system  is  thus  as  com- 
prehensive as  the  English. 

1  Levied  in  1874  ;  abolished  in  1878. 

2  Droit  sur  les  voitures  publiques.      Cf.  Vignes,   Traite  des  Impots  en 
France,  4th  edition,  i.,  p.  192. 

8  "  Sono  considerati  come  redditi  di  ricchezza  mobile  esistenti  nello  stato 
.  .  .  gli  interessi  e  dividendi  pagati  .  .  .  delle  compagnie  commercial!,  indus- 
trial! e  di  assicurazione."  Law  of  August  24,  1877,  art.  3,  b. 

*  ' '  Nel  reddito  delle  societa  anonime  ed  in  accomandita  per  azioni,  com- 
presevi  le  societa  d' assicurazione  mutua  od  a  premio  fisso  saranno  computate 
indistintamente  tutte  le  somme  ripartite  sotto  qualsiasi  titolo  fra  i  soci  e 


THE  TAXATION  OF  CORPORATIONS  205 

In  Germany  the  taxation  of  corporations  varies  widely 
in  the  different  commonwealths.1  A  few  of  the  smaller 
states  tax  corporations  for  state  purposes  only  on  their 
realty  and  on  their  occupation  (Grewerbe-steuer),  and  not 
on  their  income  or  net  profits,  because  the  shareholders  are 
individually  taxed  on  their  income  from  the  corporations. 
This  point  will  be  discussed  in  detail  in  the  following 
chapter.  In  most  of  the  states,  however,  corporations  are 
taxed  on  their  income.  In  Prussia  railroads  have  been 
assessed  since  1853  on  their  net  receipts.  The  local  taxes 
vary  exceedingly  throughout  the  empire.  But  whenever 
corporations  are  taxed  at  all  on  receipts,  it  is  on  net 
income.  Corporations  were  formerly  exempt  from  the 
local  income  tax,  but  they  are  now  usually  subject  to 
it  wherever  it  exists.2  In  only  one  instance  are  corpora- 
tions taxed  on  their  capital  stock  —  in  the  case  of  mut- 
ual insurance  companies,  whose  so-called  dividends  merely 
return  in  part  the  premiums  paid  by  policy  holders.  On 
account  of  the  difficulty  of  ascertaining  the  exact  profits, 
Baden  has  therefore  levied  the  income  tax  on  an  assumed 
amount  of  net  profits,  fixed  at  five  per  cent  of  the  capital 
stock.3 

The  net  receipts  tax  may  thus  be  declared  applicable  in 
theory  to  all  corporations.  Some  peculiar  limitations  arise, 

quelle  portate  in  aumento  del  capitale  o  del  fondo  di  riserva  ed  ammortizza- 
zione,  od  altrimente  impiegate  anche  in  estinzione  dei  debiti."  Ibid.,  art.  30. 
Cf.  in  general,  Oronzo  Quarta,  L'imposta  sulla  fiicchezza  Mobile,  2  vols. 
(Turin).  See  also  Alessio,  Saggio  sul  Sistema  Tributario  in  Italia,  i.,  p.  345  ; 
the  chapters  on  Italy  in  Chailley,  ISimpot  sur  le  Bevenu  ;  and  Burkart,  "  Die 
italienische  Steuer  auf  die  Einkiinfte  vom  beweglichen  Vermb'gen,"  in 
Schanz's  Finanz-Archiv,  vi.  (1889),  p.  30. 

1  For  full  details  as  to  corporate  taxation  in  each  of  the  German  states, 
see  Antoni,  "  Die  Steuersubjecte  in  Zusammenhalte  mit  der  Durchfuhrung 
der  Allgemeinheit  der  Besteuerung  nach  den  in  Deutschland  geltenden  Staats- 
steuergesetzen,"  in  Finanz-Archiv,  v.  (1888),  pp.  382^99,  especially  475 
et  seq. 

2  Cf.  Meier,    "Ueber  die  Frage  der  Communal besteuerung "  (in  Zehn 
Gutachten  und  Berichte  fiber  die  Communalsteuerfrage,  veroffenlicht  vom 
Vereinfiir  Socialpolitik') ,  p.  104. 

8  Lewald,  "Die  direkten  Steuern  in  Baden,"  in  Finanz-Archiv,  iii.,  p.  807. 


206  ESSAYS  IN  TAXATION 

it  is  true,  from  the  clashing  of  commonwealth  laws,  but  these 
will  be  discussed  in  the  next  chapter. 

One  objection  still  remains.  It  has  sometimes  been  urged 
that  a  tax  on  corporate  property  is  more  just  than  a  tax  on  cor- 
porate earnings,  because  the  value  of  a  corporate  security  is 
fixed  not  only  by  its  present  but  also  by  its  prospective  pro- 
ductiveness. This  is,  however,  a  specious  objection,  since 
under  a  system  of  earnings  taxation  the  future  product  will 
be  taxed  when  it  ultimately  appears.  If  productiveness  be  ac- 
cepted at  all  as  the  standard  of  capacity  —  and  this  is  tacitly 
assumed  in  the  above  objection  —  the  most  logical  and  defen- 
sible method  is  the  taxation  of  the  product  as  it  appears. 
But  consideration  for  the  individual  producer  makes  it  neces- 
sary, as  has  been  pointed  out  above,  to  regard  net,  not  gross 
product;  and,  therefore,  if  any  one  principle  be  accepted  as  the 
basis  of  the  general  corporation  tax,  it  should  be  net  profits, 
and  not  gross  earnings  or  property. 

III.    Practical  Reforms. 

Our  conclusion  that  the  taxation  of  net  receipts  is  without 
doubt  the  best  system  brings  us  face  to  face  with  the  facts 
of  American  constitutional  law.  Is  a  tax  on  receipts  uncon- 
stitutional ?  Is  it  in  conflict  with  the  constitutional  inhibition 
of  state  interference  with  interstate  commerce  ?  This  is  an 
important  question.  Let  us,  then,  consider  the  legal  as  well 
as  the  economic  aspects  of  the  problem.1 

The  earliest  important  case  involving  this  question  con- 
strued the  Pennsylvania  law  which  imposed  a  tax  on  each  ton 
of  merchandise  carried,  and  an  additional  tax  of  a  certain 
percentage  on  the  gross  receipts  of  railroad  companies.  The 
tonnage  tax  was  declared  unconstitutional.2  The  same  prin- 
ciple was  later  applied  to  a  tax  of  one  cent  for  every  message 
sent  by  a  telegraph  company.  This,  also,  was  held  to  be 
void  as  a  tax  on  interstate  commerce.3  On  the  other  hand, 

1  See  in  general,  Professor  Goodnow's  article  on  "Taxation  of  Railway 
Gross  Receipts,"  in  Political  Science  Quarterly,  ix.,  p.  233. 

2  State  Freight  Tax  Cases,  16  Wall.  232  (1872). 
•  Telegraph  Co.  vs.  Texas,  105  U.  S.  460  (1881). 


THE  TAXATION  OF  CORPORATIONS  207 

a  state  tax  on  the  gross  receipts  of  a  domestic  railroad  com- 
pany was  upheld  chiefly  on  the  ground  that  the  tax  was  laid 
upon  a  fund  which  had  already  become  property.  The  gross 
receipts  were  said  to  be  the  fruits  of  transportation  after 
they  had  become  intermingled  with  the  other  property  of 
the  carriers.1  The  court,  however,  also  contended  that  this 
was  a  tax  on  the  franchise,  measured  by  the  amount  of  the 
business  transacted,  so  that  it  was  not  clearly  decided  what 
was  taxed,  the  franchise  or  the  property.2  Later  the 
Supreme  Court  limited  this  general  principle  and  decided 
that  when  the  gross  receipts,  even  of  a  domestic  corporation, 
were  derived  entirely  from  interstate  or  foreign  commerce, 
they  could  not  be  taxed.3 

In  the  case  of  foreign  companies,  the  rule  seems  to  be  more 
strict ;  for  a  tax  on  the  gross  receipts  of  a  foreign  corpora- 
tion, even  if  derived  only  in  part  from  interstate  commerce, 
is  declared  void  to  the  extent  that  the  receipts  are  derived 
from  such  interstate  commerce.4  A  tax  on  the  gross  re- 
ceipts from  business  done  wholly  within  the  state  is,  how- 
ever, valid.6 

This  distinction  between  foreign  and  domestic  companies 

1  State  Tax  on  Eailway  Gross  Receipts,  16  Wall.  284  (1872).    This  was  in 
imitation  of  the  case  of  Brown  vs.  Maryland,  which  held  that  articles  lost 
their  character  of  imports  after  they  had  left  the  original  package  or  the 
hands  of  the  original  importer,  and  had  then  become  a  part  of  the  general 
property  of  the  state.    But  see  the  second  note  following.    See  also  Balti- 
more and  Ohio  R.  R.  Co.  vs.  Maryland,  21  Wall.  456  (1874),  which  held  that 
a  charter  stipulation  that  a  railway  should  pay  a  part  of  its  earnings  to  the 
state  as  a  bonus,  was  not  a  tax,  and  was  perfectly  valid. 

2  In  Fargo  vs.  Michigan,  121  U.  S.  210,  the  court  emphasizes  this  side  of 
the  Railway  Gross  Receipts  Tax  decision.    For  a  recent  case,  see  People  ex 
rel.  R.  R.  Co.  vs.  Campbell,  74  Hun  210. 

8  Philadelphia  S.  S.  Co.  vs.  Pennsylvania,  122  U.  S.  326  (1886).  In  this 
case  the  court  showed  that  the  case  of  Brown  vs.  Maryland  was  really  no 
authority  for  the  decision  in  the  case  of  the  State  Tax  on  Railway  Gross 
Receipts,  decided  fifteen  years  before. 

*  Fargo  vs.  Michigan,  121  U.  S.  230  (1886)  ;  Western  Union  Telegraph  Co. 
vs.  Alabama  Board  of  Assessment,  132  U.  S.  472  (1889).  Cf.  Coe  vs.  Errol, 
116  U.  S.  617  (1885). 

5  Ratterman  vs.  Western  Union  Telegraph  Co.,  127  U.  S.  411  (1888). 


208  ESSAYS  IN 

seems  to  be  maintained  in  a  recent  leading  case.  The  Maine 
tax  on  gross  receipts  was  upheld  as  being  a  tax  not  on 
receipts,  but  on  the  privilege  of  exercising  the  corporate 
franchise,  the  resort  to  receipts  being  made  simply  to  ascer- 
tain the  value  of  the  business.  But  although  this  action  was 
brought  nominally  against  a  foreign  corporation,  the  facts 
show  that  the  tax  was  due  from  a  domestic  corporation 
leased  by  this  foreign  corporation.1 

The  reason  for  the  distinction  between  domestic  and  for- 
eign corporations  seems  to  be  that  in  the  case  of  a  domestic 
corporation  the  thing  taxed  is  the  franchise,  which  may  be 
measured  at  the  discretion  of  the  legislature  (except  that 
when  all  receipts  are  from  interstate  commerce  the  tax  is 
invalid)  ;  while  in  the  case  of  a  foreign  corporation  the  fran- 
chise cannot  be  taxed,  but  only  the  business.  Since  the  thing 
taxed  in  the  latter  case  is  the  business,  the  constitutional 
provision  is  violated  whenever  that  business  is  so  extended 
as  to  include  interstate  commerce.2 

The  same  distinction  which  is  observable  in  the  Gross 
Receipts  Tax  cases  has  been  maintained  in  others.  Thus  a 
license  tax  on  foreign  companies  doing  an  interstate  busi- 
ness is  held  invalid  because  it  is  a  tax  on  the  privilege  of 
doing  interstate  commerce  ; 3  but  a  license  on  a  domestic  cor- 
poration for  boats  used  in  interstate  commerce  is  valid.4  So, 
too,  a  privilege  tax  upon  every  sleeping  car  belonging  to  a 
foreign  corporation  has  been  declared  unconstitutional  as  a 
regulation  of  interstate  commerce;  6but  when  the  sleeping  cars 
are  run  wholly  within  the  state  over  the  line  of  a  domestic 

1  Maine  vs.  Grand  Trunk  R.  R.  Co.,  142  U.  S.  217  (1891).    The  real  party 
to  the  case  was  the  Atlantic  and  St.  Lawrence  R.  R.  Co. 

2  Of.  Horn  Silver  Mining  Co.  vs.  New  York,  143  U.  S.  305. 

8  United  States  Express  Co.  vs.  Allen,  39  Fed.  Rep.  712  ;  Leloup  vs.  Port 
of  Mobile,  127  U.  S.  640  ;  Krutcher  vs.  Kentucky,  141  U.  S.  47. 

*  Wiggins  Ferry  Co.  vs.  East  St.  Louis,  107  U.  S.  365  (1882).  Cf.  Osborn 
vs.  Mobile,  16  Wall.  479  (1872),  where  a  license  fee  was  imposed  on  an  agent 
of  an  express  company  doing  business  in  Mobile. 

s  Pickard  vs.  Pullman  Southern  Car  Co.,  117  U.  S.  34  (1886).  It  was  dis- 
tinctly held  that  the  cars  in  question  had  no  situs  in  the  state  (Tennessee) 
imposing  the  tax. 


THE  TAXATION  OF  CORPORATIONS  209 

corporation,  the  tax  is  valid.1  Again,  a  tax  proportioned  to 
capital  stock  and  dividends  is  valid  as  to  domestic  corpora- 
tions even  though  they  be  engaged  in  interstate  commerce  ;  2 
but  if  the  business  of  a  foreign  corporation  is  interstate 
commerce  exclusively,  the  tax  on  capital  stock  is  void.3 
On  the  other  hand,  even  though  the  tax  be  imposed  on  a 
foreign  corporation,  if  it  is  assessed  not  on  the  business 
itself,  but  on  the  capital  stock  or  property  according  to 
mileage,  and  if  the  corporate  property  is  actually  situate 
in  the  state,  it  will  be  upheld.4 

The  law,  therefore,  seems  to  distinguish  in  part  between 
foreign  and  domestic  companies.  Yet  in  the  recent  Maine 
case,  the  tendency  of  the  court,  although  it  is  expressed  only 
in  a  dictum,  seems  to  be  opposed  to  this  distinction;  and  the 
reasoning  of  the  court  would  tend  to  uphold  a  gross  receipts 
tax,  whether  imposed  on  domestic  or  on  foreign  corpora- 
tions, provided  any  of  the  receipts  be  earned  within  the  state.5 

1  Gibson  County  vs.  Pullman  Southern  Car  Co.,  42  Fed.  Rep.  612  (1890). 
Whether  the  counties  may  levy  such  a  tax  depends  entirely  upon  the  author- 
ization which  must  be  express,  given  them  by  the  state  law. 

2  People  vs.  Wemple,  117  N.  Y.  136  (1889). 

8  People  ex  rel.  Pennsylvania  R.  R.  Co.  vs.  Wemple,  138  N.  Y.  (1893). 
This  was  the  case  of  a  railroad  corporation  whose  line  terminated  without  the 
state,  but  which  had  terminal  facilities  within  the  state  for  the  delivery  of 
passengers  and  freight,  the  sale  of  tickets  and  the  collection  of  dues.  A  some- 
what similar  case  was  that  of  Gloucester  Ferry  Co.  vs.  Pennsylvania,  114  U.  S. 
196  (1885) .  Here  the  state  attempted  to  impose  a  tax  on  the  capital  stock  of  a 
New  Jersey  company  having  no  property  in  Pennsylvania  except  a  wharf 
in  Philadelphia.  This  tax  was  held  void,  as  an  interference  with  interstate 
commerce.  Another  similar  case  was  that  of  Norfolk  and  Western  R.  R. 
Ce.  vs.  Pennsylvania,  136  U.  S.  114  (1890).  The  railway  had  no  line 
in  the  state,  but  had  an  office  there,  and  traffic  contracts  which  made  it  a 
part  of  a  system  doing  interstate  business.  A  tax  on  capital  stock  of  this 
corporation  was  held  invalid,  as  interfering  with  interstate  commerce. 

*  Pullman  Car  Co.  vs.  Pennsylvania,  141  U.  S.  18  (1890)  ;  Pullman  Pal- 
ace Car  Co.  vs.  Assessors,  55  Fed.  Rep.  206  (1893).  Of.  Telegraph  Co.  vs. 
Massachusetts,  125  U.  S.  530  (1890). 

6  "The  privilege  of  exercising  the  franchises  of  a  corporation  within  a 
state  is  generally  one  of  value,  and  often  of  great  value  and  the  subject  of 
earnest  contention.  It  is  natural,  therefore,  that  the  corporation  should  be 
made  to  pay  some  proportion  of  the  burdens  of  the  government.  As  the 


210  ESSAYS  IN  TAXATION 

It  is  greatly  to  be  hoped  that  this  dictum  may  soon  be 
developed  into  law,  for  from  the  economic  point  of  view 
the  distinction  between  domestic  and  foreign  corporations 
is  entirely  indefensible.  Strictly  carried  out,  it  would 
render  substantial  justice  in  taxation  almost  impossible. 
If  a  foreign  corporation  cannot  be  taxed  where  its  earnings 
are  received,  because  it  is  a  foreign  corporation  ;  and  if 
it  cannot  be  taxed  by  the  state  of  its  domicile,  because 
the  earnings  are  not  received  there,  it  would  manifestly 
evade  its  due  share  of  the  burden.  But  if  every  state 
could  tax  the  receipts  of  any  corporation,  so  far  as  they 
are  actually  earned  within  the  state,  no  corporation  could 
escape  under  the  plea  of  its  foreign  origin,  and  the  founda- 
tions would  be  laid  for  an  equitable  system  based  on  inter- 
state agreement.  The  force  of  the  constitutional  provision 
would,  moreover,  still  be  sufficiently  strong  to  prevent  unjust 
discriminations  against  foreign  commerce  or  foreign  business. 
Even  granting  that  under  the  present  interpretation  of 
the  law  a  tax  on  the  gross  receipts  is  invalid,  the  case  is 
not  yet  closed  in  relation  to  a  tax  on  net  profits  or  income. 
If  a  gross  receipts  tax  is  unconstitutional,  will  not  a  net 
receipts  tax  be  equally  so  ?  An  obiter  dictum  of  the  court 
might  lead  us  to  suppose  that  there  is  a  legal  distinction 
between  a  net  income  and  a  net  receipts  tax,  and  that  the 
former,  as  applied  to  transportation  companies,  is  permis- 
sible.1 In  the  memorandum  of  a  new  system  of  taxation 

granting  of  the  privilege  rests  entirely  in  the  discretion  of  the  state,  whether 
the  corporation  be  of  domestic  or  foreign  origin,  it  may  be  conferred  upon 
such  conditions,  pecuniary  or  otherwise,  as  the  state  in  its  judgment  may 
deem  most  conducive  to  its  interests  or  policy.  .  .  .  The  character  of  the 
tax  or  its  validity  is  not  determined  by  the  mode  adopted  in  fixing  its  amount 
for  any  specific  period  or  the  times  of  its  payment.  .  .  .  The  rule  of  appor- 
tioning the  charge  to  the  receipts  of  the  business  would  seem  to  be  eminently 
reasonable,  and  likely  to  produce  the  most  satisfactory  results  both  to  the 
state  and  the  corporation  taxed."  Justice  Field,  in  Maine  vs.  Grand  Trunk 
E.  R.  Co.,  142  U.  S.  217  (1891). 

1  The  court  holds  that  the  gross  receipts  tax  is  unconstitutional  because  it 
is  a  tax  not  on  income,  but  on  receipts,  i.e.  on  transportation.  Query :  would 
not  a  tax  on  income  then  be  constitutional  ?  See  122  U.  S.  345. 


THE  TAXATION  OF  CORPORATIONS  211 

published  by  a  member  of  the  revenue  commission  of  Penn- 
sylvania, it  is  assumed  that  such  a  tax  does  not  fall  within 
the  scope  of  the  recent  decisions,  but  is  perfectly  consti- 
tutional.1 This  would  be  a  result  much  to  be  desired; 
but  it  must  be  confessed  that  the  final  opinion  of  the  court 
is  problematical,  in  view  of  its  extreme  sensitiveness  to  any 
interference  with  interstate  commerce.2 

If  the  decision  of  the  court  should  be  adverse,  only  one 
course  would  remain  open  in  regard  to  transportation  com- 
panies. Granting  that  a  tax  on  net  receipts  is  the  best,  and 
that  a  state  tax  on  net  receipts  is  declared  illegal,  there 
might  be  a  national  net  receipts  tax.  The  federal  law  might 
impose  a  tax  on  net  receipts,  providing  for  the  levy,  if 
necessary,  by  the  commonwealth  officials  themselves,  and 
apportioning  the  proceeds  according  to  the  mileage  in  each 
state.  Such  a  plan  would  be  free  from  objections  of  an 
economic  nature  and  would  avoid  many  of  the  difficulties 
connected  with  double  taxation.  The  principle  would  be 
analogous  to  that  of  the  English  "grants  in  aid."  But 
however  desirable  such  a  plan  would  be,  it  is  doubtful 
whether  the  national  government  has  the  constitutional 
right  to  levy  a  tax  for  such  purposes.  Entirely  apart  from 
the  question  of  power,  moreover,  it  must  be  confessed  that 
such  a  federal  tax  on  net  earnings  is  improbable,  at  all  events 
in  the  near  future.  As  we  are  seeking  not  only  the  ideal,  but 
also  the  practicable,  some  other  plan  must  be  devised. 

The  only  other  method  of  taxing  transportation  com- 
panies which  at  all  deserves  approbation  is  that  first  em- 
ployed in  Connecticut,  and  since  then  in  several  other 
states,  viz.,  laying  the  tax  on  the  market  value  of  the 
stock  plus  the  indebtedness,  in  the  proportion  that  the 
mileage  within  the  state  bears  to  the  total  mileage.  This 

1  John  A.  Wright,  Memorandum  of  a  System  of  Taxation,  submitted  to  the 
Commission  for  Revision  of  the  Revenue  Laws  of  Pennsylvania  (1890),  pp. 
10,  13. 

4  "  In  imposing  [franchise]  taxes  care  should  be  taken  not  to  interfere 
with  or  hamper  directly  or  by  indirection  interstate  or  foreign  commerce." 
122  U.  R.  345.  Cf.  127  U.  S.  648. 


212  ESSAYS  IAT  TAXATION 

would  be  applicable  to  railway,  telegraph,  telephone  and 
express  companies,  but  of  course  not  to  ocean  or  coastwise 
steamship  companies,  which  have  no  mileage  within  any 
state.  Connecticut,  as  we  know,  applies  the  tax  only  to 
railroads.  Such  a  tax  would  be  certain,  simple  of  en- 
forcement, and  would  attain  justice  as  among  the  separate 
states.  As  we  have  seen,  it  would  not  attain  perfect 
justice  as  among  the  separate  corporations ;  yet  it  is  so  far 
superior  to  all  the  other  methods  which  have  been  discussed, 
that  it  can  be  strongly  recommended  as  the  type  to  which 
the  commonwealths  should  conform  their  taxation  of  trans- 
portation companies,  if  the  net  receipts  tax  be  pronounced 
unconstitutional.  As  to  all  other  corporations,  however, 
where  the  constitutional  limitation  would  scarcely  ever 
apply,  the  logical  and  practicable  system  would  be  to  tax 
them  on  their  net  revenue  according  to  carefully  defined 
rules.  Wherever  special  conditions  prevent  the  employment 
of  this  method,  they  should  be  taxed  on  a  valuation  equal 
to  that  part  of  the  market  value  of  the  capital  plus  the 
bonded  debt  employed  within  the  state. 

This,  therefore,  is  our  general  conclusion;  but  it  does 
not  yet  exhaust  the  problem  of  corporate  taxation.  We 
are,  in  fact,  only  on  the  fringe  of  the  difficulties.  Let  us 
proceed  in  the  next  chapter  to  study  some  of  the  more  com- 
plicated questions. 

NOTE  OF  3o  ED. — A  new  step  in  the  taxation  of  franchises  has  been 
taken  by  New  York  in  1899.  The  law  taxes  as  a  "special  franchise"  the 
privilege  conferred  upon  quasi-public  corporations  to  make  use  of  city  streets 
and  public  places,  either  on,  above,  or  below  the  surface.  This  franchise  is 
to  be  assessed  as  real  estate,  and  the  proceeds  devoted  to  the  locality.  The 
ascertainment  of  the  values  of  this  franchise  is  left,  not  to  the  local  assessors, 
who  still  tax  the  corporation  upon  the  visible  real  estate  and  the  personalty, 
but  to  the  State  Board.  See  in  general,  Seligman,  "  The  Franchise  Tax  Law 
in  New  York,"  Quarterly  Journal  of  Economics,  xiii.,  pp.  445-452.  A 
somewhat  similar  "special  franchise"  tax  law  was  enacted  in  New  Jersey 
in  1900. 


CHAPTER  VIII. 

THE  TAXATION  OF   CORPORATIONS. 
III. 

COMPLICATIONS    AND    CONCLUSIONS. 

THE  discussion  of  the  taxation  of  corporations  would  be 
incomplete  without  an  examination  of  the  various  phases 
of  double  taxation.  This  is  the  more  necessary  for  the 
reason  that  no  attempt  at  a  thorough  analysis  has  ever  yet 
been  made.  Yet  the  problems  that  hinge  upon  this  par- 
ticular question  are  so  especially  important  in  the  United 
States  as  to  demand  the  most  serious  attention. 

In  a  former  chapter1  we  have  already  discussed  some  of 
the  general  aspects  of  double  taxation.  Let  us  now  attempt 
to  develop  the  principles  in  the  light  of  actual  practice. 

There  are  in  reality  no  less  than  five  different  forms  of 
double  taxation  in  the  case  of  corporations  :  — 

1.  Double  taxation  of  property  and  of  debts,  or  of  income 
and  of  interest  on  debts. 

2.  Double  taxation  of  property  and  of  income. 

3.  Double  taxation  of  property  and  of  stock. 

4.  Double  taxation  arising  from  conflicts  of  jurisdiction. 

5.  Double  taxation  of  the  corporation  and  of  the  holders 
of  stock  or  bonds. 

I.    Taxation  of  Property  and  of  Debts. 

This  first  case  need  not  detain  us  long.  The  only  illustra- 
tions in  the  United  States  are  found  under  the  general 

1  Supra,  chap.  iv. 
213 


2H  ESSAYS  IN-  TAXATION 

property  tax,  which  we  have  discarded  as  the  basis  of  cor- 
poration taxation.  In  many  of  the  states  corporate  debts 
must  be  considered  in  estimating  the  value  of  the  capital 
stock.  In  New  York,  as  regards  local  taxation,  the  indebt- 
edness must  be  taken  into  account  in  assessing  the  capital 
stock ;  but  after  the  valuation  has  been  fixed,  the  amount 
of  the  indebtedness  cannot  be  deducted.1  If  the  capital 
stock  is  of  no  value  because  the  indebtedness  exceeds  the 
assets,  it  should  not  be  assessed.2  In  the  case  of  foreign 
corporations,  however,  which  are  taxable  on  the  amounts 
invested  in  the  state,  it  has  been  held  that  the  law  does  not 
contemplate  the  deduction  of  debts.3 

We  have  already  pointed  out  that  there  is  really  no 
injustice  in  not  exempting  corporate  indebtedness.  The 
issue  of  mortgage  bonds  by  a  corporation  is  simply 
another  mode  of  increasing  the  working  capital.  Correct 
policy  demands  the  taxation  of  corporate  bonds  as  well  as 
of  stock,  of  loans  as  well  as  of  share  capital.  To  tax  cor- 
porate debts  may,  indeed,  be  called  double  taxation  in  so 
far  as  the  tax  on  both  stock  and  debt  is  paid  out  of  the 
same  income ;  but  if  so,  it  is  double  taxation  of  a  perfectly 
legitimate  kind.  It  is  here  that  the  principles  of  indi- 
vidual and  corporate  taxation  diverge. 

Some  of  the  American  commonwealths,  as  California, 
Connecticut,  Maryland  and  Pennsylvania,  recognize  this 
distinction  between  the  taxation  of  individuals  and  that 
of  corporations,  by  permitting  the  deduction  of  indebted- 
ness from  the  property  of  individuals  but  refusing  a  like 
deduction  in  the  case  of  corporate  property.  In  California, 
the  courts  held  distinctly  that  what  would  be  double  taxa- 
tion in  the  case  of  individuals  is  permissible  in  the  case 
of  corporations.4  Some  of  the  Swiss  cantons,  like  St.  Gall, 
Zurich  and  Ticino,  observe  the  same  distinction.6 

1 1  Thomp.  and  C.  636  ;  100  N.  Y.  597  ;  112  N.  Y.  565. 

2  People  vs.  Commissioners,  31  Hun  32  (1st  Department). 

8  People  vs.  Barker,  141  N.  Y.  118. 

*  Central  Pacific  K.  R.  Co.  vs.  Board  of  Equalization,  60  Cal.  35. 

5  Schanz,  Die  Steuern  der  Schweiz,  ii.,  p.  338  ;  ii.,  p.  435 ;  iv.,  p.  281. 


THE  TAXATION  OF  CORPORATIONS  215 

Perhaps  more  interesting  and  probably  of  greater  future 
importance  in  the  United  States  is  the  other  phase  of  this 
question  of  the  taxation  of  indebtedness  —  double  taxation 
of  income  and  of  interest  on  debt.  While  the  true  theory 
of  income  taxation  in  the  case  of  individuals  demands  the 
deduction  of  interest  on  debts,  it  has  already  been  shown 
that  in  the  case  of  corporations  the  interest  paid  on  mort- 
gage bonds  must  be  included  in  the  taxable  income.  Taxa- 
tion of  interest  on  corporate  debt  is  not  double  taxation, 
because  the  coupons,  like  the  dividends,  are  integral  parts 
of  the  income ;  because  both  bonds  and  stock  together  form 
what  is  really  the  working  capital  from  which  the  income  is 
derived.  This  question  has  already  been  discussed ;  but 
the  radical  difference  in  economic  significance  between  a 
corporate  bond  and  an  individual  debt  must  be  continually 
borne  in  mind. 

II.   Taxation  of  Income  and  of  Property. 

This  second  form  of  double  taxation,  like  the  first,  in- 
volves no  very  complicated  question  ;  nor  does  the  solution 
present  many  difficulties.  Is  it  permissible  to  tax  a  cor- 
poration both  on  its  property  and  on  its  net  receipts  or 
income?  If  corporations  are  put  upon  the  same  plane  as 
individuals,  the  simultaneous  taxation  of  the  property  and 
of  the  income  from  the  property  works  no  injustice.  As 
we  have  seen  above  \  if  all  are  treated  alike  and  if  the  tax 
is  uniform,  there  is  really  no  cause  for  complaint. 

So  far  as  corporations  are  concerned,  this  is  not  a  matter 
of  practical  importance.  The  only  case  in  which  this  special 
question  has  arisen  in  the  United  States  was  under  the  laws 
of  Alabama,  now  repealed,  which  provided  for  the  taxation 
of  corporate  property  and  also  of  the  corporate  income  dur- 
ing the  preceding  year.2  Such  taxation  was  upheld  on  the 

1  Supra,  pp.  97-98. 

2  Ala.  laws  of  Feb.  22,  1866 ;  Feb.  19,  1867 ;  Dec.  31,  1868 ;  March  19, 
1876  ;  March  6,  1876. 


216  ESSAYS  IN  TAXATION 

ground  that  it  was  only  apparently  double  taxation.1  What 
the  court  meant  was,  of  course,  not  that  it  was  not  double 
taxation,  but  that  it  was  not  invalid  or  economically  unsound 
taxation.  In  this  the  court  was  correct,  for  the  law  applied 
equally  to  all  individuals  and  to  corporations. 

At  present  in  the  United  States  no  attempt  is  made  to 
tax  simultaneously  both  corporate  property  and  corporate 
income.  The  nearest  approach  to  the  practice  is  the  system 
in  Pennsylvania  and  New  York  of  taxing  the  capital  stock 
and  also  the  gross  receipts  of  certain  corporations.  No  objec- 
tion has  been  raised  to  these  taxes  on  the  score  of  double 
taxation  ;  nor  is  it  likely  that  such  an  objection  ever  will  be 
raised.  One  might  as  well  object  to  a  combination  of  direct 
and  indirect  taxes  as  involving  duplicate  taxation,  on  the 
ground  that  all  taxes  are  in  the  last  resort  paid  (or  presumed 
to  be  paid)  out  of  annual  income.  So,  again,  in  some  of  the 
Southern  and  Western  states,  as  we  know,  corporations  are 
taxed  on  their  business,  by  license  or  occupation  taxes,  and 
again  on  their  receipts,  and  this  practice  is  upheld  as  per- 
fectly valid.2  This  second  form  of  double  taxation  is  en- 
tirely proper. 

The  classic  home  of  double  taxation  of  this  sort  is  Switzer- 
land. Baselstadt,  for  instance,  taxes  corporations  one  per 
mill  on  the  paid-up  capital,  a  quarter  of  one  per  mill  on 
the  capital  not  yet  paid  up,  and  one  per  cent  on  the  total 
net  income  from  all  sources.3  In  Baselland  corporations  are 
taxed  on  their  general  property  and  again  on  their  total 
profits,  with  the  exception  that  when  any  of  the  profits 
consist  of  interest  on  capital  the  profits  are  not  taxed  if  the 
capital  has  already  been  assessed.*  Many  of  the  cantons, 
however,  seek  to  avoid  the  simultaneous  taxation  of  prop- 
erty and  income  by  an  arrangement  of  the  following  sort: 

1  Board  of  Review  vs.  Montgomery  Gas  Light  Co.,  64  Ala.  276.     Cf.  Lott 
vs.  Hubbard,  44  Ala.  593. 

2  Cf.  95  Mo.  360,  where  the  court  holds  that  it  is  not  duplicate  taxation. 

•  Law  of  1889,  §§  2,  3.  Schanz,  Die  Steuern  der  Schweiz,  ii.,  p.  84 ;  v., 
p.  60.  *  Schanz,  op.  cit.,  i. ,  p.  56  ;  v.,  p.  35. 


THE  TAXATION  Of  CORPORATIONS  217 

While  the  law  provides  for  the  assessment  of  both  prop- 
erty and  income,  a  deduction  is  made  in  the  case  of  the  in- 
come tax  for  so  much  of  the  income  as  is  supposed  to  repre- 
sent the  actual  profits  of  the  capital  already  taxed.  The 
proportion  thus  deducted  is  fixed  in  accordance  with  the 
estimated  current  rate  of  interest,  ranging  from  four  per 
cent  in  Thurgau  and  Grisons  to  five  per  cent  in  Zug,  Schaff- 
hausen,  Ticino,  Vaud  and  Zurich.  The  federal  government 
deducts  five  per  cent.1  This  principle  has  now  also  been 
applied  in  Prussia,  where  since  1891  the  income  tax  is  as- 
sessed on  corporate  income,  after  deducting  a  sum  equal  to 
three  and  a  half  per  cent  of  the  paid-up  capital.2  Bern  and 
St.  Gallen  are  the  only  Swiss  cantons  which  attempt  to  draw  a 
sharper  line  by  levying  the  property  tax  only  on  the  cor- 
porate real  estate,  but  subjecting  all  the  other  property  to 
an  income  tax.3  In  St.  Gallen  the  real  estate  tax  is  for 
local,  the  income  tax  for  cantonal  purposes. 

The  solution  of  the  supposed  difficulty  attempted  by  the 
majority  of  the  Swiss  commonwealths  is,  however,  not  a 
happy  one.  The  deduction  from  income  of  the  four  or  five 
per  cent,  assumed  to  represent  the  earnings  of  property, 
involves  a  misconception.  It  is  impossible  to  say  how  much 
of  the  income  represents  earnings  of  capital  and  how  much 
represents  the  other  ingredients  of  profit.  We  are  brought 
face  to  face  with  complicated  questions  of  economic  theory 
—  with  the  distinction  between  interest  and  profits,  and  the 
separate  ingredients  of  profits.  A  discussion  of  these  ques- 
tions lies  beyond  the  province  of  this  essay.  But  it  may 
be  confidently  asserted  that  if  a  railway  corporation  with  no 
bonded  indebtedness  and  a  capital  of  one  million  dollars 
earns  seventy-five  thousand  dollars,  it  is  impossible  to  main- 
tain that  fifty  thousand  dollars  represents  the  earnings  of  the 
property  and  the  remainder  the  earnings  of  the  management. 
From  one  point  of  view  all  such  profits  are  profits  on  capital 

1  Ibid.,  I,  p.  56. 

Einkommensteuergesetz  vom  24  Juni,  1891,  §  16. 
Schanz,  op.  eft.,  ii.,  pp.  318,  368  ;  iii.,  p.  292. 


2 


218  ESS  Ays  IN  TAXATION 

or  property.  An  individual  can  indeed  obtain  a  professional 
income  without  any  capital ;  but  in  the  case  of  a  business 
with  capital  invested,  it  is  impossible  to  say  how  much  of  the 
profits  are  due  to  the  capital,  how  much  to  the  personal 
management.  Without  the  capital  there  would  be  no  profits 
at  all,  because  there  would  be  no  business.  Therefore,  in 
taxing  profits  we  are  really  taxing  property,  or  rather  the  pro- 
ceeds of  property.  To  segregate  a  part  of  these  proceeds  and 
to  say,  as  do  the  Swiss  cantons,  that  only  this  particular 
part  represents  the  income  from  the  property,  is  an  entirely 
arbitrary  proceeding. 

Again,  it  cannot  be  contended  that  even  this  four  or  five 
per  cent  of  income  exempted  by  the  Swiss  laws  represents 
only  the  interest  on  the  capital,  and  that  the  remainder 
of  the  income  represents  the  earnings  of  management. 
Under  no  theory  of  economic  profits  can  the  surplus  above 
current  interest  be  entirely  dissociated  from  capital.  Even 
granting  that  a  sharp  line  can  be  drawn  between  interest, 
earnings  of  management  and  profits,  it  still  remains  incor- 
rect to  confine  the  proceeds  of  capital  to  interest  alone. 
It  is  thus  inadmissible  to  say  that  in  taxing  income  only  on 
the  surplus  above  four  or  five  per  cent  of  the  taxable  capital 
we  avoid  taxing  both  property  and  income. 

The  Swiss  system  has  indeed  a  very  decided  significance 
in  connection  with  an  entirely  different  matter,  viz.,  the 
question  of  funded  or  unfunded  income.  But  as  regards 
the  point  now  under  discussion  it  is  evident  that  the  Swiss 
cantons  do  not  really  succeed  in  avoiding  double  taxation. 
As  we  have  seen,  however,  it  is  a  form  of  double  taxation 
which  is  in  itself  legitimate. 

III.    Taxation  of  Property  and  of  Stock. 

This  third  form  of  duplicate  taxation  must  not  be  under- 
stood to  refer  to  the  taxation  of  shares  of  stock  in  the  hands 
of  individuals.  That  is  a  different  problem,  and  falls  under 
another  heading,  to  be  discussed  below.  The  point  here  to 


THE  TAXATION  OF  CORPORATIONS  219 

be  discussed  is  this  :  Is  it  permissible  to  tax  the  corporation 
on  its  property  and  again  on  its  capital  stock  ? 

The  answer  is  plain.  Manifestly  not,  if  the  corporate 
stock  can  be  regarded  as  representing  actual  property.  We 
have,  indeed,  seen  that  it  is  a  mistake,  economically,  to  say, 
as  do  some  of  our  courts,  that  the  entire  property  of  a  cor- 
poration is  identical  with  its  capital  stock.  This  point  has 
been  brought  out  so  well  in  a  Massachusetts  case,  and  is  so 
generally  misunderstood,  that  it  may  be  wise  to  make  a 
more  extended  quotation  from  the  decision  :  — 

The  market  value  of  the  shares  of  a  corporation  .  .  .  does  not 
necessarily  indicate  the  actual  value  or  amount  of  property  which 
a  corporation  may  own.  The  price  for  which  all  the  shares  would 
sell  may  greatly  exceed  the  aggregate  of  the  corporate  property, 
or  it  may  fall  very  far  short  of  it.  Undoubtedly  the  amount  of 
property  belonging  to  a  corporation  is  one  of  the  considerations 
which  enter  into  the  market  value  of  its  shares ;  but  such  market 
value  also  embraces  other  essential  elements.  It  is  not  made  up 
solely  by  the  valuation  or  estimate  which  may  be  put  on  the  cor- 
porate property,  but  it  also  includes  the  profits  and  gains  which 
have  attended  its  operations,  the  prospect  of  its  future  success, 
the  nature  and  extent  of  its  corporate  rights  and  privileges,  and 
the  skill  and  ability  with  which  its  business  is  managed.  In  other 
words,  it  is  the  estimate  put  on  the  potentiality  of  a  corpora- 
tion, on  its  capacity  to  avail  itself  profitably  of  the  franchise,  and 
on  the  mode  in  which  it  uses  its  privileges  as  a  corporate  body, 
which  materially  influences  and  often  controls  its  market  value.1 

While  it  is  true,  therefore,  that  capital  stock  and  total  prop- 
erty are  not  interchangeable  terms,  it  cannot  be  denied  on 
the  other  hand  that  the  capital  stock  represents  at  all  events 
a  part  of  the  property,  or  rather  that  the  corporate  property  is 
one  of  the  elements  that  contribute  to  the  value  of  the  capital 
stock.  So  far  as  this  is  true,  the  simultaneous  taxation  of 
corporate  property  and  corporate  stock  involves,  to  this 
extent  at  least,  duplicate  taxation  of  an  unjust  character. 

1  Commonwealth  vs.  Hamilton  Manufacturing  Co.,  12  Allen  303. 


220  ESSAYS  IN  TAXATION- 

Unfortunately,  there  is  no  absolute  uniformity  in  the 
legal  decisions  on  this  point.  While  the  majority  of  the 
commonwealths  hold  taxation  of  this  kind  to  be  unjust, 
Pennsylvania  has  pronounced  it  valid.  In  a  celebrated  case 
the  court  used  this  language  :  — 

Double  taxation  has  never  been  considered  unlawful  in  this 
state.  The  real  and  personal  property  of  a  corporation  may  be 
taxed,  although  it  pays  a  tax  on  the  stock  which  purchased  it. 
The  power  of  the  legislature  is  as  ample  to  tax  twice  as  to  tax 
once,  and  it  is  done  daily  as  all  experience  shows.  Equality  of 
taxation  is  not  required  by  the  constitution.1 

Such  a  decision  may  be  correct  legally,  but  beyond  all 
doubt  it  is  unsound  economically.  Equality  of  taxation 
may  not  be  required  by  the  constitution  of  Pennsylvania, 
but  it  is  one  of  the  first  laws  in  the  science  of  finance. 
Abandon  equality,  and  you  throw  the  door  wide  open  to  all 
kinds  of  glaring  abuses.  The  theory  as  formulated  by  the 
Pennsylvania  courts  cannot  possibly  be  upheld  from  the 
scientific  standpoint. 

The  Pennsylvania  courts,  however,  hold  that  so  far  as 
the  capital  stock  of  a  domestic  corporation  represents  tangi- 
ble property  outside  of  the  state  it  is  not  taxable.2  Further, 
it  has  recently  been  decided  that  the  real  estate  of  a  corpora- 
tion, being  part  of  its  capital  stock  and  paying  state  taxes,  is 
not  locally  taxable.3  Finally,  in  another  case  it  has  been  held 
that  so  far  as  the  property  of  a  corporation  is  essential  to 
the  exercise  of  its  corporate  franchise,  it  is  included  in  the 
capital  stock  and  is  not  taxable.  The  law  will  not  subject 
it  to  duplicate  taxation  by  mere  inference.4  Thus  Pennsyl- 
vania is  gradually  abandoning  its  earlier  decisions. 

Far  wiser  from  the  very  beginning  were  the  Maryland 

1  Pittsburgh  etc.  R.  R.  Co.  vs.  Pennsylvania,  66  Pa.  State  77.     Of.  Lacka- 
wanna  Iron  Co.  vs.  Luzerne  County,  42  Pa.  State  424. 

2  101  Pa.  State  119 ;  41  Legal  Intelligencer  125. 
«  7  Lane  317. 

*  148  Pa.  State  162  ;  148  Pa.  State  282.    See  also  145  Pa.  State  96. 


THE  TAXATION  OF  CORPORATIONS  221 

courts,  which  held  that  all  laws  must  be  so  construed  as  to 
avoid  double  taxation  of  this  kind  ;  and  that,  since  in  their 
opinion  the  capital  stock  of  a  corporation  represents  the  cor- 
porate property,  the  payment  by  the  corporation  of  a  tax  on 
capital  stock  necessarily  exempts  all  the  corporate  property.1 
In  this  broad  form  the  decision  is  perhaps  open  to  criticism 
because  of  the  complete  identification  of  capital  stock  with 
corporate  property  ;  but  as  regards  the  point  at  issue  here, 
it  is  correct.  To  tax  corporations  simultaneously  on  their 
stock  and  on  their  property  is  indefensible.  A  few  common- 
wealths, like  Alabama,  Illinois,  Indiana,  Maryland,  Vermont 
and  (for  local  purposes)  New  York,  have  now  recognized 
this  principle  in  their  statutes,  deducting  from  the  value  of 
the  capital  stock  the  value  of  the  realty  or  of  both  the  real 
and  personal  property  taxed.2 

On  the  other  hand,  the  apparently  similar  statute  of 
Massachusetts,  which  taxes  corporations  on  their  capital 
stock  less  the  value  of  the  real  estate  and  machinery,3  is 
open  to  criticism  for  another  reason.  According  to  the 
Massachusetts  law,  corporations  are  taxable  by  the  local 
bodies  on  their  real  estate  and  machinery,  but  at  a  rate 
equivalent  to  the  combined  rate  for  local  and  state  purposes. 
They  are  then  taxable  by  the  state  on  the  value  of  their 
capital  stock,  deducting  the  value  of  the  real  estate  and 
machinery ;  but  this  state  tax  is  fixed  at  a  rate  equivalent 
to  the  combined  local  and  state  rate  on  general  property. 
While,  therefore,  Massachusetts  avoids  double  taxation  of 
both  property  and  stock,  it  does  not  solve  the  problem  of 
affording  the  commonwealth  government  an  adequate  reve- 

1  County  Commissioners  vs.  National  Bank,  48  Md.  117.     Cf.  State  vs. 
Stirling,  20  Md.  520;  State  vs.  R.  R.  Co.,  40  Md.  22. 

2  Md.  law  of  1878,  in  Pub.  Gen.  Laws,  art.  81,  §§  84,  85,  141-144 ;  Ala. 
Code,  §  453,  sec.  8 ;    111.  Rev.  Stat.,  chap.  120,  §  3 ;   Ind.  Laws  of  1891, 
chap.  4  ;  New  York  Laws  of  1857,  chap.  456,  §  3,  vol.  2,  p.  1 ;  Vt.  Rev. 
Laws,  §  288.    In  New  York,  as  we  know,  corporations  are  locally  taxable 
on  their  realty  and  their  capital  stock,  deducting  the  amount  invested  in  real 
estate. 

8  Mass.  Pub.  Stat.,  chap.  13,  §  40 


222  ESSAYS  IN  TAXATION 

nue.  According  to  the  theory  elsewhere  elaborated  in  these 
chapters,  corporations  should  always  be  locally  taxable  on 
their  realty  ;  but  the  commonwealth  tax  should  be  levied 
on  the  total  income,  or  on  the  total  property,  without  any 
deductions  (except  those  arising  from  considerations  of 
interstate  comity  and  equity,  to  be  discussed  below).  The 
whole  treatment  of  double  taxation  is  here  based  on  the 
assumption  that  the  tax  is  levied  by  administrative  units  of 
the  same  grade,  whether  states  or  local  divisions.  It  mani- 
festly does  not  apply  to  cases  where  one  tax  is  levied  by  the 
commonwealth,  and  another  similar  or  different  tax  is  levied 
by  the  county  or  city,  as  in  Massachusetts.  Otherwise  we 
should  be  forced  to  the  conclusion  that  the  property  tax 
always  involves  a  double,  triple  or  quadruple  taxation 
so  far  as  state,  county,  town  and  village  levy  different 
rates  on  the  same  property.  This  is,  however,  only  a 
juggle  with  words ;  such  taxation  is  not  in  the  scientific 
sense  double  taxation.  Strictly  speaking,  therefore,  the 
Massachusetts  principle,  while  ostensibly  sound,  is  really 
incorrect.  So  far,  however,  as  it  attempts  to  solve  another 
problem  —  that  of  the  division  of  the  tax  between  the 
place  where  the  corporation  carries  on  its  business,  and  the 
place  where  the  stockholder  resides  —  the  law  is  deserving 
of  consideration.  But  that  is  a  point  which  belongs  properly 
to  one  of  the  subsequent  sections. 

In  Switzerland,  we  find,  in  the  few  cases  where  both 
tangible  property  and  capital  are  assessed,  that  the  value 
of  the  taxable  property  is  deducted  from  the  corporate  capi- 
tal. Thus  the  new  constitution  of  1885  in  Aargau  provides 
for  the  taxation  of  the  corporate  real  estate  for  both  com- 
monwealth and  local  purposes,  the  value  of  the  realty  being 
then  deducted  from  the  capital  stock.1  The  same  custom 
prevails  in  Schaffhausen.2  The  Swiss  tendency,  like  the 
American,  is  gradually  coming  to  be  in  accord  with  the 
sounder  principles. 

1  Schanz,  Die  Steuern  der  Schweiz,  ii. ,  p.  239. 
8  Ibid.,  ii.,  p.  170  (note  1). 


THE  TAXATION  OF  CORPORATIONS  223 

We  come  now  to  the  most  important  aspects  of  double 
taxation  —  the  fourth  and  fifth  forms.  Here  we  have  the 
benefit  of  a  wide  European  experience.  In  the  phases  of 
duplicate  taxation  hitherto  treated  we  can  learn  very  little 
from  Europe,  because  in  no  European  state  except  Switzer- 
land are  the  corporations  taxed  on  their  property  as  a 
whole  ;  and  in  Switzerland  the  entire  question  of  corpora- 
tion law  is  in  a  far  more  inchoate  condition  than  in  the 
more  developed  industrial  states.  But  the  problems  that 
we  now  take  up  present  themselves  in  Europe  as  well  as  in 
the  United  States,  and  have  there  received  in  some  respects 
extended  consideration,  although  they  have  not  yet  been 
successfully  solved. 

IV.    Double  Taxation  due  to   Conflicts  of  Jurisdiction. 

This  fourth  form  of  duplicate  taxation  appears  in  connec- 
tion with  almost  every  method  of  corporate  taxation.  It  is 
so  comprehensive  that  it  will  be  advisable  to  discuss  the 
subject  under  four  chief  headings  :  — 

1.  Interstate  taxation  of  corporate  property. 

2.  Interstate  taxation  of  stock  and  bonds  or  of  dividends 
and  interest. 

3.  Interstate    taxation   of   non-resident   stockholders   or 
bondholders. 

4.  Interstate  taxation  of  corporate  receipts  or  income. 

1.  Interstate  taxation  of  corporate  property.  The  diffi- 
culty here  arises  in  connection  with  the  taxation  of  personal 
property.  In  the  case  of  real  estate  the  rule  universally 
adopted  in  the  United  States  is  that  the  property  should  be 
taxed  where  it  is  situated,  and  there  is  accordingly  no  chance 
for  interstate  complications.  But  in  the  case  of  personalty 
the  great  problem  is  that  of  situs.  Should  the  personalty 
be  taxed  where  it  is  situated  or  should  it  follow  the  domicile 
of  the  owner?  The  legal  conditions  in  the  United,  States 
are  most  unsatisfactory. 


224  ESSAYS  IN  TAXATION' 

We  have  seen  in  another  place  1  that  the  American  states 
waver  between  the  principles  of  situs  and  of  mobilia  personam 
sequuntur,  —  that  is,  some  tax  only  the  personalty  actually 
situated  in  the  state  ;  while  others  tax  all  the  personalty, 
no  matter  where  situated,  of  a  resident.  The  same  piece 
of  personal  property  may  therefore  be  taxed  in  two  states. 
The  obvious  result,  of  course,  is  double  taxation  of  a  nature 
which  cannot  possibly  be  justified. 

In  the  case  of  corporations,  we  are  confronted  by  precisely 
the  same  difficulties,  for  corporate  property  is  treated  in 
the  main  like  that  of  individuals.  It  is  entitled  to  the  same 
exemptions  and  subject  to  the  same  conditions.  It  will  be 
readily  perceived,  however,  with  what  difficulties  the  prob- 
lem is  beset  when,  as  is  usually  the  case,  the  personalty  of  a 
corporation  is  assessed  at  its  place  of  business  as  the  legal 
situs.  In  many  states,  like  Michigan,  Pennsylvania  and  New 
York,  it  has  been  held  not  permissible  to  tax  corporations 
for  property  outside  the  state  ;2  and  in  South  Carolina  the 
tax  is  specifically  limited  to  corporate  property  within  the 
state.3  In  other  cases  it  has  been  held  that  the  movable 
property  of  a  corporation  in  use  in  other  states  is  taxable 
only  in  the  state  of  the  corporation's  domicile.4  In  Penn- 
sylvania, it  has  been  held  that  corporate  property,  consisting 
of  dredges,  etc.,  not  permanently  located  anywhere,  may  be 
taxed  in  the  state  of  the  corporation's  domicile  as  part  of  the 
stock.5  Some  states,  like  New  York  and  California,  apply 
the  same  rule  to  corporate  as  to  individual  property,  and 
seek  to  avoid  double  taxation  of  this  kind.  In  New  York,  in 
order  to  exempt  the  personal  property  of  a  corporation  be- 

1  Supra,  p.  112. 

2  State  Treasurer  ex  rel.  vs.  Auditor-General,  46  Mich.  224  ;    Graham  vs. 
Township  of  St.  Joseph,  67  Mich.  652, 

8  S.  C.  Rev.  Stat.  chap.  12,  sec.  28.  For  other  cases,  see  Commonwealth 
vs.  Railroad  Co. ,  145  Pa.  State  96,  distinguishing  Commonwealth  vs.  Dredg- 
ing Co.,  122  Pa.  State  386 ;  Commonwealth  vs.  Westinghouse  Air  Brake 
Co.,  151  Pa.  State  276;  Commonwealth  vs.  St.  Bernard  Coal  Co.,  9  South- 
western Reporter  709  (Ky.). 

*  Baltimore  and  Ohio  R.  R.  Co.  vs.  Allen,  22  Fed.  Rep.  376. 

6  Commonwealth  vs.  American  Dredging  Co. ,  122  Pa.  State  386. 


THE  TAXATION  OF  CORPORATIONS  225 

cause  it  is  outside  of  the  state,  the  change  of  location  must  be 
permanent  and  unequivocal.1  But  in  most  of  the  states  the 
rule  mobilia  personam  sequuntur  is  applied,  and  domestic 
corporations,  at  all  events,  are  taxed  on  their  whole  property.2 
In  the  case  of  foreign  corporations,  however,  it  is  fast 
becoming  the  custom,  even  in  most  of  the  states  which  levy 
a  corporate  property  tax,  to  exempt  the  intangible  property, 
on  the  principle  that  the  domicile  of  the  foreign  corporation 
is  not  changed  by  its  doing  business  in  other  states.3 

Manifestly,  if  the  commonwealths  will  still  cling  to  the 
policy  of  taxing  the  actual  corporate  property,  the  only  logi- 
cal and  just  method  is  for  each  state  to  exempt  so  much  of 
the  corporate  property  as  is  already  taxable  in  another  state. 
The  federal  government  has  unfortunately  not  exercised  its 
right,  —  if  indeed  it  possesses  any  —  to  compel  such  uni- 
formity. Our  only  hope,  therefore,  lies  in  the  progress  of 
correct  public  sentiment  and  its  influence  on  commonwealth 
legislation.  Until  then,  we  shall  still  be  confronted  by  the 
present  confusion. 

2.  Interstate  taxation  of  corporate  securities.  The  evils 
arising  from  the  simultaneous  taxation  by  different  states  of 
the  same  corporate  stock  or  bonds  or  of  dividends  and  inter- 
est have  been  so  patent  as  to  lead  to  statutory  changes  and 
judicial  interpretations  of  considerable  importance.  In  Penn- 
sylvania, after  being  long  the  custom,  it  has  now  been 
judicially  decided  to  be  the  law,  that  the  tax  on  capital  stock 
applies  not  to  the  whole  capital  but  only  to  such  a  proportion 
of  the  capital  stock  as  is  employed,  either  actually  or  con- 

1  People  ex  rel.  Pacifjc  Mail  S.  S.  Co.  vs.  Commissioners,  64  N.  Y.  541. 
As  to  how  the  realty  outside  the  state  should  be  valued,  see  52  Hun  93 ; 
People  ex  rel.  Panama  R.  R.  Co.  vs.  Commissioners,  104  N.  Y.  240  (1887). 
For  California,  see  San  Francisco  vs.  Fry,  63  Cal.  470  (1883)  ;  San  Francisco 
vs.  Flood,  64  Cal.  504  (1884). 

2  So,  for  instance,  in  New  Jersey  personal  property  outside  of  the  state, 
which  is  exempt  in  the  case  of  individuals,  is  taxable  when  owned  by  cor- 
porations.   State  vs.  Metz,  3  Vroom  199  ;  State  vs.  Haight,  6  Vroom  279. 

8  Cf.  Insurance  Co.  vs.  Assessors,  44  La.  Ann.  760.     Cf.  ibid.,  765. 
Q 


226  ESSAYS  IN  TAXATION 

structively,  within  the  state.1  In  New  York,  the  original 
statute  attempted  to  follow  the  old  rule  ;  but  the  law  has 
now  been  so  amended  as  to  provide  expressly  for  the  taxation 
of  only  so  much  of  the  capital  stock  as  is  employed  within 
the  state.2  In  a  case  which  arose  under  the  old  statute, 
although  decided  after  the  passage  of  the  amendment,  the 
court  of  appeals  declared  itself  forced  to  adhere  to  the  old 
rule,  saying  that,  although  it  was  extremely  hard  and  unjust, 
the  court  was  unable  so  to  construe  the  statute  as  to  relieve 
the  corporation  from  the  provisions  of  the  law.3  The  prin- 
ciple in  both  these  commonwealths  now  applies  equally  to 
domestic  and  to  foreign  corporations.  In  Massachusetts, 
however,  where  the  franchise  tax,  as  we  have  seen,  is  appli- 
cable only  to  domestic  corporations,  the  general  corporation 
tax  is  levied  on  the  total  capital  stock  irrespective  of  its 
employment. 

So  far  as  railroads  are  concerned,  it  has  become  the  common 
practice  to  assess  only  so  much  of  the  capital  stock  as  is  rep- 
resented by  the  proportion  which  the  mileage  in  the  state 
bears  to  the  total  mileage.  This  is  true  even  in  states 
like  Massachusetts,  which  do  not  apply  the  principle  to 
corporations  in  general,  as  well  as  in  states  like  Connecticut, 
where  stock  and  bonds  are  taxable.  Such  a  standard,  while 
not  perfectly  exact,  is  fairly  accurate  ;  and  has  been  up- 
held as  entirely  constitutional.4  It  is  applicable  equally 
to  telegraph  companies  and  to  other  transportation  com- 
panies ;  and  is  gradually  being  applied  to  them,  although 
not  quite  so  commonly  as  in  the  case  of  railroads,  in  all  those 
states  which  tax  capital  stock  directly.  The  principle  is 
sound,  although  it  may  be  contended  with  justice  that  busi- 
ness done,  i.e.  receipts,  is  an  even  better  test  than  mileage. 

1  Commonwealth  vs.  Standard  Oil  Co.,  101  Pa.  State  119.      As  to  the 
previous  custom,   etc.,  see    Decisions   of    the   Auditor-General,    1878-80, 
p.   296. 

2  New  York  Laws  of  1885,  chap.  601,  p.  868. 

8  People  vs.  Horn  Silver  Mining  Co.,  105  N.  Y.  76,  especially  88. 
*  Delaware  Railroad  Tax  Case,  18  Wall.  208 ;  Erie  Railroad  vs.  Pennsyl- 
vania, 21  Wall.  492. 


THE  TAXATION  OF  CORPORATIONS  227 

For  other  corporations,  however,  it  will  readily  be  seen 
how  vague  is  the  New  York  and  Pennsylvania  doctrine  of 
"capital  employed  within  the  state."  What  business  firm 
or  corporation  with  ramifications  all  over  the  country  can 
tell  exactly  or  even  approximately  how  much  of  its  capital  is 
"  employed "  within  any  one  state  ?  Even  if  they  can, 
how  many  of  them  will  tell,  when  concealment  will  enable 
them  to  evade  the  tax?  In  some  of  our  commonwealths  the 
state  officers  have  the  right  to  inspect  the  books  of  corpo- 
rations and  to  change  the  assessments  if  they  deem  them 
too  low.  Even  then,  what  guarantee  is  there  that  they  will 
discover  the  real  proportion  ?  The  taxation  of  so  much  of 
the  capital  as  is  employed  within  the  state  is  extremely 
difficult. 

It  is  interesting  to  notice  some  recent  New  York  decisions 
on  this  point.  A  Massachusetts  corporation  —  a  telephone 
company  —  was  taxed  in  New  York  by  assessing  the 
whole  capital  in  proportion  to  the  number  of  telephones 
used  in  the  state.  Although  the  whole  tax  was  declared 
invalid  for  another  reason,  viz.,  that  the  corporation  was 
not  technically  "  doing  business "  in  the  state,  the  court 
entered  into  a  discussion,  obiter  indeed,  of  the  question  with 
which  we  are  dealing  here.  Chief  Justice  Ruger  used  the 
following  language :  — 

It  is  by  no  means  clear  that  the  mode  adopted  .  .  .  produces  a 
correct  result.  .  .  .  We  are  quite  unable  to  sanction  a  principle 
which  would  subject  it  [the  corporation]  to  the  liability  of  being 
taxed,  not  only  in  [the  state]  where  it  is  located,  as  it  undoubtedly 
would  be  under  the  law  as  laid  down  by  us  [in  the  Horn  Silver 
Mining  Company  Case],  on  its  entire  capital  stock  and  gross  earn- 
ings ;  but  also  in  each  state  of  the  Union  in  which  it  should  own 
telephones  on  such  proportion  of  its  capital  stock  and  gross  earn- 
ings as  the  law-makers  of  such  state  saw  fit  to  impose.1 

It  is  difficult  to  see  the  justice  of  this  conclusion.     It  happens 
to  be  true  that  Massachusetts  still  follows  the  incorrect  and 

1  People  vs.  American  Bell  Telephone  Co.,  117  N.  Y.  242,  especially  256. 


228  ESSAYS  IN  TAXATION 

inequitable  plan  of  taxing  the  whole  capital.  But  that  is  no 
excuse  for  the  New  York  court  to  interpret  the  old  statute 
in  the  same  way,  or  to  assume  that  other  states  will  also 
follow  the  precedent  which  the  court  itself  pronounces  "  ex- 
tremely hard  and  unjust."  Two  wrongs  do  not  make  a 
right.  In  the  absence  of  any  federal  law  regulating  the 
subject,  the  only  upright  course  for  each  commonwealth  to 
pursue  is  to  follow  the  dictates  of  interstate  comity  and  the 
sound  principles  of  the  science  of  finance  by  taxing  only  so 
much  of  the  corporate  capacity  as  is,  economically  speaking, 
within  its  jurisdiction.  As  we  have  repeatedly  said,  the 
taxation  of  corporate  stock  is  by  no  means  the  ideal  method. 
But  if  the  New  York  principle  of  taxing  capital  stock  and 
gross  earnings  be  nevertheless  followed,  it  is  difficult  to 
discover  any  more  practicable  or  more  defensible  method  of 
ascertaining  the  due  proportion  of  capital  stock  employed  or 
gross  profits  earned  within  the  state  than  by  considering  the 
number  of,  or  royalties  from,  the  telephones  used.  This  is 
analogous  to  the  Connecticut  system  of  proportional  mileage 
as  applied  to  railroad  companies.  In  the  case  of  telephone 
companies,  however,  the  number  of  instruments  used  is  a 
better  test  than  the  mileage  of  the  telephone  wires ;  for  the 
capital,  as  well  as  the  expenses,  is  far  more  nearly  in  direct 
proportion  to  the  number  of  telephones  in  use  than  to  the 
amount  of  the  wire  employed. 

In  the  above  case  the  law  was  declared  invalid  because  the 
tax  was  assessed  on  a  foreign  corporation.  Even  though 
this  foreign  corporation  held  stock  in  various  domestic  cor- 
porations, it  was  not  legally  doing  business  in  the  state ;  since 
before  a  foreign  corporation  can  be  taxed  under  the  New  York 
law  it  must  not  only  employ  a  portion  of  its  capital  in  that 
state,  but  must  also  be  engaged  in  doing  business  there.1  In 
the  case  of  a  domestic  corporation  the  fact  that  the  capital  is 
employed  within  the  state  is  a  sufficient  ground  for  taxation. 
So  far  as  its  capital  stock  is  invested  in  the  stock  of  foreign 

1  People  ex  rel.  American  Construction  and  Dredging  Co.  vs.  Wemple,  129 
N.  Y.  558  (1892). 


THE  TAXATION  OF  CORPORATIONS  229 

companies,  it  is  not  taxable  because  it  is  not  employed  within 
the  state  ;  but  so  far  as  its  capital  is  invested  in  the  bonds  of 
foreign  corporations  taken  in  return  for  the  sale  of  patent 
rights,  it  is  taxable.1  In  another  case  it  was  held  that  the 
proportion  of  sales  within  the  state  to  the  total  sales  of  a 
foreign  corporation  is  not  a  fair  test  of  the  capital  employed 
within  the  state.  Sales  may  be  made  by  sample,  so  that 
the  corporation  may  simply  keep  an  office  in  the  state  and 
employ  none  of  its  capital  there.2 

In  some  recent  laws,  as  in  Kentucky,  the  proportion  of  the 
capital  stock  which  is  taxed  must  bear  the  same  proportion 
to  the  entire  capital  stock  that  the  corporate  receipts  in  the 
state  bear  to  the  total  corporate  receipts.  This  is  a  simple 
solution  of  the  problem,  but  falls  properly  under  the  head- 
ing of  double  taxation  of  receipts,  to  be  discussed  below. 

3.  Interstate  taxation  of  non-resident  bondholders  or  stock- 
holders. The  subject  of  the  taxation  of  corporate  stock  or 
bonds  is  complicated  in  another  way  by  the  question  of  extra- 
territoriality. The  problem  is  this  :  Can  a  corporation, 
even  though  its  capital  be  employed  wholly  within  the  state, 
be  taxed  on  its  capital  or  bonded  debt  if  these  are  owned  in 
part  by  residents  of  another  state? 

The  federal  Supreme  Court  has  arrived  at  some  very 
remarkable  conclusions.  So  far  as  bonds  are  concerned, 
the  above  practice  has  been  pronounced  unconstitutional. 
In  one  case  it  has  been  held  that  a  state  tax  on  bonds  issued 
by  a  railroad  company  and  secured  by  a  mortgage  on  a  line 
lying  partly  in  another  state  was  void,  because  the  state  was 
taxing  to  that  extent  "property  and  interests  beyond  her 
jurisdiction."3  A  later  case  went  further  and  decided  in 
general  terms  that  a  tax  on  corporate  bonds  is  invalid  as  to 
non-resident  owners,  because  the  debts  are  not  the  property 

1  People  ex  rel.  Edison  Electric  Light  Co.  vs.  Campbell,  139  N.  Y.  543 
(1893). 

2  People  ex  rel.  The  Seth  Thomas  Clock  Co.  vs.  Wemple,  133  N.  Y.  323 
(1892). 

8  Railroad  Company  vs.  Jackson,  7  Wall.  262. 


230  ESS AyS  IN  TAXATION' 

of  the  debtor,  i.e.  the  corporation,  but  of  the  creditors,  i.e. 
the  bondholders.  They  are  the  obligations,  not  the  property, 
of  the  debtors.  But  the  creditors  cannot  be  taxed  on  their 
property  because  they  are  not  within  the  jurisdiction  of  the 
state.1  The  particular  statute  in  this  case  was  the  Pennsyl- 
vania law  of  1868,  requiring  corporations  to  retain  five  per 
cent  on  the  interest  due  on  the  bonds,  payable  to  non-resi- 
dents. The  state  courts  which  had  hitherto  entertained  a 
different  opinion  were  compelled  to  acquiesce  ;  and  in  a 
later  case,  decided  in  the  same  commonwealth,  the  state  tax 
on  corporate  loans,  i.e.  on  bonded  indebtedness,  was  upheld 
only  so  far  as  it  applied  to  the  bonds  owned  by  the  resi- 
dents,2 being  declared  to  be  a  tax  on  the  bondholder,  not 
on  the  corporation.3  This,  therefore,  is  the  accepted  law  of 
the  land  as  to  bonds. 

Shares  of  stock,  on  the  other  hand,  are  treated  quite  differ- 
ently. It  has  indeed  been  decided  that  a  state  tax  on  divi- 
dends is  unconstitutional  as  to  non-residents  if  the  corporation 
be  required  to  withhold  the  tax  from  the  dividends.4  The 
New  Jersey  courts,  moreover,  have  held  that  a  corporation  is 
not  liable  on  that  part  of  its  stock  owned  by  non-residents.6 
The  Maryland  statute,  as  we  know,  is  to  the  same  effect.  The 
United  States  courts,  however,  have  uniformly  maintained 
that  a  state  tax  on  capital  stock,  even  though  the  stock  be 
held  partly  by  non-residents,  is  legitimate  on  the  ground 
that  the  tax  is  laid  on  the  corporation  as  a  whole,  and  not 
on  the  individual  shareholder.6  A  recent  case  has  even 
decided  that  a  state  tax  on  the  shares  of  stockholders,  which 
the  company  is  required  to  pay  irrespective  of  dividends,  is 
not  a  tax  on  the  shareholders  but  on  the  corporation.7  This 
is  held  to  be  true  notwithstanding  the  fact  that  in  another 

1  State  Tax  on  Foreign-held  Bonds,  15  Wall.  300. 

2  Commonwealth  vs.  Delaware  Division  Canal  Co.,  123  Pa.  694. 
8  Bell's  Gap  R.  R.  Co.  vs.  Commonwealth,  134  U.  S.  232. 

4  Oliver  vs.  Washington  Mills,  11  Allen  268. 
«  26  N.  J.  181 ;  3  Zabriskie  506,  517. 

6  Delaware  Railroad  Tax  Case,  18  Wall.  208. 

7  New  Orleans  vs.  Houston,  119  U.  S.  265. 


THE  TAXATION"  OF  CORPORATIONS  231 

case  a  tax  on  dividends  or  interest  paid  by  the  corporation 
was  held  to  be  a  tax  on  the  income  of  the  stockholder  or  of 
the  creditor,  and  not  on  the  income  of  the  corporation.1 

The  present  state  of  the  law,  therefore,  is  that  the  entire 
capital  stock  of  a  corporation  may  be  taxed  by  any  common- 
wealth, but  that  only  so  much  of  the  bonds  are  taxable  to 
the  corporation  as  are  owned  by  residents  of  the  state.  The 
mere  statement  of  this  proposition  makes  it  evident  how 
impracticable  would  be  the  otherwise  admirable  system  of 
taxing  corporations  by  a  separate  tax  on  stock  and  an 
additional  tax  on  bonds.  The  Pennsylvania  system,  which 
at  first  blush  seemed  to  be  an  excellent  solution  of  the 
problem,  thus  appears  to  be  shorn  of  its  chief  merits,  if 
the  present  law  of  the  land  is  sound.  The  great  majority  of 
states,  the  bonds  of  whose  corporations  are  owned  mainly 
outside  of  the  state  in  large  financial  centres  like  New  York  or 
Boston,  would  find  such  a  tax  sadly  inadequate.2  Even  in  the 

1  United  States  vs.  Railroad  Co.,  17  Wall.  332. 

2  An  investigation  by  the  Pennsylvania  Tax  Conference  disclosed  the 
following  facts  as  to  certain  Pennsylvania  railroads  :  — 

AMO.NT  m  „  P.. 


$450,000  $116,000  $450,000        100 

352,000  63,000  1,400,000 

72,800  2,700  383 

230,000  -  384 

240,000  8,000  48,000 

320,000  -  121,100 

5,250,000  1,200,000  3,388,550 

890,000  -  1,400,000 

990,000  80,000  1,278,300 

3,400,000  6,000  2,000,000 

2,900,000  -  127,000        50 

-  -  800,000        100 

-  -  3,546,670 
179,000  179,000  144,376 

2,280,000  2,100,000  2,900,000 

495,000  456,000  1,850,000 

500,000  410,000  650,000 

200,000  200,000  80,000 

1,800,000  1,800,000  600,000 

800,000  800,000  800,000 

270,000  260,000  2,370,466 

300,000  300,000 

275,000  - 

-  -  642,000 


232  ESSAYS  IN  TAXATION 

state  of  New  York,  where  the  comptroller  is  now  clamoring 
for  a  tax  on  corporate  indebtedness,  the  proceeds  would  fall 
far  below  the  actual  capacity  of  the  corporations.  The  deci- 
sions of  the  Supreme  Court  prevent  double  taxation,  it  is 
true,  but  they  do  it  so  effectually  as  also  to  prevent  just 
taxation.  The  situation  would  be  intolerable. 

The  same  difficulty  applies  to  the  taxation  of  bonds  of 
foreign  corporations  held  in  the  state.  A  recent  case  has 
decided  that  a  state  cannot  impose  upon  a  corporation  char- 
tered by  another  state,  when  paying  in  that  other  state  the 
interest  due  upon  bonds  held  by  a  resident  of  the  first  state, 
the  duty  of  deducting  from  the  interest  so  paid  the  amount 
assessed  upon  the  bonds  by  a  tax  law  of  the  first  state.1 

From  the  economic  point  of  view,  these  decisions  are  inde- 
fensible. If  the  tax  on  capital  stock  is  a  tax  on  the  corpo- 
ration, then  the  tax  on  mortgage  bonds  is  equally  a  tax  on 
the  corporation.  Stock  and  bonds  together  represent  the 
corporate  property,  for  the  value  of  the  stock  is  diminished 
by  the  existence  of  the  bonds.  The  bondholders,  viewed 
from  the  economic  standpoint,  are  no  more  creditors  of  the 
corporation  than  are  the  stockholders.  They  are  co-proprie- 
tors, just  as  mortgagor  and  mortgagee  are  in  economic  fact 
co-owners  of  the  land.  It  is,  therefore,  impossible  to  see  any 
justification  for  taxing  non-resident  stockholders  while  ex- 
empting non-resident  bondholders.  The  same  rule  should 
be  applied  to  both  classes,  for  their  interests  in  the  pros- 
perity of  the  corporation  are  in  this  respect  precisely  the 
same.  The  original  Pennsylvania  decision  which  was  re- 
versed by  the  federal  Supreme  Court  rested  on  an  earlier  case 
involving  much  the  same  question,  known  as  Maltby's  Case. 
And  with  all  due  deference  to  the  Supreme  Court,  it  must  be 
stoutly  maintained  that  to  the  student  of  political  economy 

Some  of  the  results  are  very  absurd:  Railroad  no.  4,  although  having 
$230,000  bonds,  paid  a  tax  of  $1.92.  Road  no.  18,  worth  about  the  same 
amount,  paid  01*200.00.  The  last  road  but  one  paid  no  taxes  at  all.  The 
road  half  of  whose  mileage  was  in  the  state  paid  nothing  at  all  on  its 
$2,900,000  bonds. 

1  Railroad  Co.  vs.  Pennsylvania,  153  U.  S.  629. 


THE  TAXATION  OF  CORPORATIONS  233 

the  original  Pennsylvania  decision  seems  sounder  than  that 
rendered  by  the  federal  tribunal.  In  Maltby's  Case  the 
court  uses  the  following  language  :  — 

What  would  the  plaintiff's  [a  non-resident]  loan  be  worth  if  it 
were  not  for  the  franchises  conferred  upon  the  corporation  by  the 
commonwealth  [of  Pennsylvania],  franchises  which  are  main- 
tained and  protected  by  the  civil  and  military  power  of  the  com- 
monwealth. ...  It  is  on  this  ground  that  the  legislature  dis- 
criminates between  corporation  loans  and  private  debts  as  objects 
of  taxation.  .  .  .  The  loans  and  stocks  of  a  railroad  company 
resemble  each  other  in  many  respects.  Both  are  subscribed  under 
the  authority  of  a  special  law,  and  both  are  so  far  capital  that  they 
are  employed  for  the  same  general  purpose.  .  .  .  Although  loans 
and  stocks  are  distinguishable  for  many  purposes,  yet  the  legisla- 
ture committed  no  very  great  solecism  in  treating  loans  as  taxable 
property  within  our  jurisdiction.  .  .  .  Corporation  loans,  though 
in  one  sense  mere  debts,  are,  like  moneys  at  interest,  taxable  as 
property.1 

This  is  perfectly  sound  political  economy,  although  it  is 
not  now  the  law  of  the  United  States. 

It  is  remarkable  that,  in  several  cases  decided  since  the 
leading  case  of  the  state  tax  on  foreign-held  bonds,  the 
Supreme  Court  has  applied  to  the  relations  between  the  fed- 
eral government  and  foreign  states  a  principle  entirely  dif- 
ferent from  that  which  it  invoked  in  the  case  of  the  common- 
wealths. It  has  been  held  that  the  national  tax  imposed 
during  the  Civil  War  on  the  dividends,  coupons  and  profits 
of  transportation  companies  is  an  excise  tax  on  the  business, 
and  that  it  is  valid  even  though  the  dividends  or  interest 
are  withheld  from  «a  foreign  stockholder  or  bondholder.2 
Justice  Field  in  a  dissenting  opinion  showed  the  incongruity 
between  these  decisions  and  the  earlier  ones  as  applied  to 
commonwealth  laws.  He  said  :  — 

1  Maltby  vs.  Reading  and  Columbus  Railroad  Co.,  53  Pa.  State  140. 

2  Railroad  Company  vs.  Collector,  100  U.  S.  595  (1879)  ;  United  States  vs. 
Erie  Railroad  Co.,  106  U.  S.  327  (1882). 


234  ESSAYS  IN  TAXATION 

If  the  United  States  can  do  this,  why  may  not  the  state  do  the 
same  thing  with  reference  to  the  bonds  issued  by  corporations 
created  under  their  laws  ?  What  is  sound  law  for  one  sovereignty 
ought  to  be  sound  law  for  another.1 

This  protest,  however,  was  in  vain,  and  the  legal  status  of 
the  problem  continues  to  be  anomalous.  The  federal  gov- 
ernment can  impose  a  tax  on  the  total  stock  and  bonds,  or 
total  dividends  and  interest  of  corporations,  irrespective  of 
the  residence  of  the  holders.  The  separate  commonwealths, 
on  the  other  hand,  which  are  treated  like  foreign  countries 
in  the  case  of  corporate  stock  or  dividends,  can  impose  a  tax 
on  only  so  much  of  the  bonds  or  interest  as  are  owned  by, 
or  due  to,  residents.  This  is  of  course  illogical. 

A  peculiarly  interesting  complication  arises  in  those  com- 
monwealths where  the  law  of  mortgage  has  been  changed 
for  tax  purposes.  One  of  the  chief  grounds  of  the  decision 
in  the  Foreign-held  Bond  Case  was  that  since  the  railroad 
lands  on  which  the  bonds  and  mortgages  were  issued  lay  in 
Pennsylvania,  the  non-resident  bondholder  had  no  property 
therein.  Said  Justice  Field :  — 

The  property  in  no  sense  belonged  to  the  non-resident  bond- 
holder or  to  the  mortgagee  of  the  company.  The  mortgage 
transferred  no  title;  it  created  only  a  lien  upon  the  property. 
Though  in  form  a  conveyance,  it  was  both  in  law  and  equity  a 
mere  security  for  the  debt.  The  mortgagee  has  no  estate  in  the 
land. 

It  would  be  interesting,  if  this  were  the  proper  place,  to 
trace  the  law  of  mortgage  through  both  the  Roman  and  the 
English  law,  and  to  show  that  in  each  system  the  mortgagee 
originally  had  both  possession  and  property;  that  in  a  later 
stage  he  had  no  property  in  the  land  but  retained  the  posses- 
sion; until  finally  he  had  neither  property  nor  possession, 
but  simply  a  lien.2  Be  that  as  it  may,  it  is  true  that  Justice 

1 106  U.  S.  335. 

2  For  the  Roman  law  of  fiducia,  pignus  and  hypotheca,  see  Hunter,  Roman 
Law,  pp.  262-276.  For  the  development  of  the  English  law,  see  Digby,  An 
Introduction  to  the  History  of  the  Law  of  Seal  Property,  chap,  v.,  §  5  (2). 


THE  TAXATION  OF  CORPORATIONS  235 

Field  correctly  represented  the  American  law  on  the  subject. 
That  the  mortgagee  has  no  estate  in  the  land  is  the  Penn- 
sylvania law  j1  and  similar  cases  have  been  decided  in 
the  same  way  in  other  commonwealths.  Thus,  in  an  Iowa 
case,  a  corporation  mortgage  held  by  a  non-resident  was 
declared  non-taxable  in  Iowa  because  "  the  mortgagee  has 
only  a  chattel  interest.  .  .  .  The  mortgage  is  personal  prop- 
erty .  .  .  and  attaches  to  the  person  of  the  owner."2  So 
also  under  the  old  constitution  of  California,  a  case  of  inter- 
municipal  taxation  was  decided  in  the  same  way.  A  judg- 
ment of  record  in  one  county  upon  the  foreclosure  of  a 
mortgage  situated  in  that  county,  the  owner  of  the  judg- 
ment being  the  resident  of  another  county,  was  held  not  tax- 
able in  the  first  county  because  "  the  thing  secured  by  the 
mortgage  is  intangible  and  has  no  situs  distinct  and  apart 
from  the  residence  of  the  holder.  It  pertains  to  and  follows 
the  person."3 

It  will  be  seen  that  all  these  cases  turn  upon  the  point  that 
the  mortgage  is  personal  property  ;  but  in  California  and  in 
Massachusetts,  as  we  know,4  it  has  been  provided  that  the 
interest  of  the  mortgagee  should  be  considered,  for  purposes 
of  taxation  only,  as  realty.  This  changes  the  whole  situation 
and  entirely  undermines  the  foundation  of  the  decision  in 
the  Foreign-held  Bond  Case.  If  the  interest  of  the  non-resi- 
dent bondholder,  i.e.,  the  mortgagee,  is  no  longer  personalty, 
it  does  not  follow  the  person  of  the  bondholder,  but  may  be 
taxed  by  the  commonwealth  in  which  the  corporation  is 
situated.  The  taxation  of  non-resident  bondholders  must 
thus  be  assimilated  in  these  states  to  that  of  non-resident 
stockholders,  and  the  federal  decision  will  therefore  be  appli- 
cable to  one  part,,  but  inapplicable  to  another  part,  of  the 
United  States.  It  may  even  happen  that  the  corporate  prop- 

1  Rickert  vs.  Madeira,  45  Pa.  State  463. 

2  Davenport  vs.  The  Mississippi  and  Missouri  Railroad  Co.,  12  Iowa  539. 

8  People  vs.  Eastman,  25  Cal.  603.  See  also  State  of  Nevada  vs.  Earl,  1 
Nevada  State  397  ;  State  vs.  Ross,  3  Zabriskie  517. 

4  Supra,  p.  103.  In  California,  however,  this  does  not  apply  to  railroads 
and  other  quasi-public  corporations. 


236  ESSAYS  IN  TAXATION" 

erty  covered  by  the  mortgage  is  situated  in  several  different 
states,  so  that  part  of  the  bonds  may  be  subject  to  one  law, 
part  to  another.  The  ensuing  complications  may  be  easily 
imagined.  It  would  be  far  better  for  the  Supreme  Court 
to  abandon  the  whole  contention  and  on  purely  economic 
grounds  to  reverse  its  decision.  In  assessing  a  tax  on  capital 
stock  or  bonded  debt,  it  should  be  entirely  immaterial  whether 
or  not  some  of  the  stockholders  or  bondholders  live  with- 
out the  state.  The  residence  of  the  security  holder  should 
have  nothing  to  do  with  the  taxation  of  the  corporation. 

If  the  tax  is  imposed  not  on  the  corporation  but  on  the 
shareholders,  non-resident  stockholders  would  naturally 
escape,  because  outside  the  tax  jurisdiction.  In  some  cases, 
however,  it  is  provided  that  corporations  must  then  pay 
taxes  for  the  non-resident  stockholders,1 

From  one  point  of  view  there  is  indeed  some  force  in  the 
contention  that  the  residence  of  the  security  holder  should 
be  considered.  It  may  often  occur  that  the  stock  and  bonds 
of  a  corporation  lying  within  one  state  may  be  owned  by 
residents  of  another  state.  If  the  whole  fortune  of  these 
individuals  is  invested  in  such  securities,  the  second  state 
would  get  no  revenue  at  all  if  it  exempted  securities  of  taxed 
corporations.  Yet  the  individuals  certainly  owe  some  duty 
to  the  state  of  their  residence  ;  their  economic  ^allegiance, 
so  to  speak,  is  partly  due  to  the  state  where  they  live. 
On  the  other  hand  it  is  equally  clear  that  the  corporation 
owes  a  decided  duty  to  the  state  where  it  is  situated  and 
where  its  earnings  are  secured.  How  is  this  conflict  to  be 
avoided  ? 

The  most  desirable  solution  of  the  difficulty,  as  we  have 
already  intimated,  would  seem  to  be  the  division  of  the  tax 
between  the  state  of  the  corporation  and  that  of  the  security 
holder.  Each  party  possesses  taxable  faculty  or  ability 
within  the  borders  of  the  respective  states  —  the  corporation 
where  it  earns  its  money,  the  security  holder  where  he  resides 

1  Md.  Rev.  Code,  part  viii.,  art.  xi.,  §  87  ;  N.  J.  Rev.,  1877,  p.  1199  (as  to 
banks);  Ore.  Gen.  Laws,  1872,  chap.  57,  art.  1,  §  6. 


THE  TAXATION  OF  CORPORATIONS  237 

and  enjoys  the  benefit  of  government.  For  each  state  to 
levy  the  entire  tax  would  be  double  taxation  ;  hence,  if  one 
party  is  taxed,  the  other  should  be  exempt.  In  order  to 
obviate  the  complete  loss  of  revenue  to  the  one  state,  and 
to  satisfy  the  conflicting  claims,  the  principle  of  economic 
allegiance  must  be  invoked,  and  each  state  must  be  per- 
mitted to  tax  that  portion  of  the  economic  faculty  that 
properly  falls  within  this  category.  This  of  course  must  be 
arranged  by  interstate  agreement.  The  plan  has  not  yet 
been  tried  in  any  American  state,  because  no  serious  attempt 
has  yet  been  made  to  grapple  with  the  difficulties  ;  yet  no 
final  escape  from  the  complexities  of  double  taxation  can 
be  attained  until  some  such  method  is  adopted.  But  even 
though  the  proceeds  ought  to  be  so  divided,  the  tax  ought  to 
be  levied  as  a  whole,  entirely  irrespective  of  the  residence  of 
the  security  holder.  This  part  of  the  problem  may  be 
solved  according  to  the  system  proposed  by  the  Tax  Con- 
ference of  Pennsylvania  and  practised  in  some  other  states, 
like  Illinois,  Indiana  and  Connecticut;  namely,  by  assessing 
the  corporation  on  a  valuation  equal  to  the  market  value 
of  the  whole  capital  stock  plus  the  entire  bonded  debt,  with 
a  provision  that  only  so  much  of  the  capital  shall  be  assessed 
as  is  economically  within  the  state. 

4.  Interstate  taxation  of  receipts  or  income.  This  phase 
of  interstate  double  taxation  presents  far  less  difficulty.  In 
regard  to  gross  receipts  the  measure  of  faculty  is  very  simple, 
vzz.,  the  gross  receipts  from  business  done  within  the  state. 
In  the  case  of  insurance  companies  this  is  fast  becoming 
the  general  rule  in  this  country.  When  the  returns  do 
not  show  the  precise  amount  of  the  gross  receipts,  the  laws 
often  provide,  especially  in  the  case  of  transportation  com- 
panies, that  the  proportion  is  to  be  ascertained  by  the  ratio 
of  mileage  within  the  state  to  the  total  mileage  ;  and  this 
method  has  generally  been  upheld.1  The  question  has  some- 

1  18  Wall.  208,  231.  Cf.  92  U.  S.  608 ;  125  U.  S.  530 ;  45  Md.  384  ;  141 
U.  S.  18  ;  55  Fed.  Eep.  206. 


238  ESSAYS  IN  TAXATION 

times  arisen  whether  the  word  mileage  is  to  be  interpreted 
to  mean  miles  of  track  or  miles  of  line.  The  former  is, 
however,  the  correct  economic  basis.  In  Wisconsin  mileage 
has  even  been  held  to  include  side  tracks.1  The  mileage 
principle  has  also  been  applied  to  street  railway  companies, 
in  the  assessment  of  lines  within  and  without  the  city 
limits.2 

The  same  arrangement  is  really  applicable,  as  we  have  seen, 
to  all  corporations  except  transportation  companies.  The 
reason  for  the  exception  is  that  a  tax  on  business  transacted 
wholly  within  the  state  would  result  in  a  practical  exemption 
of  the  larger  part  of  railway  earnings  —  that  derived  from, 
or  in  any  way  connected  with,  interstate  transportation. 
As  to  other  corporations,  however,  the  gross  earnings  tax 
can  be  easily  arranged  so  as  to  obviate  double  taxation. 

If  the  gross  earnings  tax  be  discarded,  as  we  have  sug- 
gested, and  if  a  tax  on  net  receipts  or  income  be  imposed, 
how  does  the  matter  stand  then  ?  Strictly  speaking,  only 
so  much  of  the  income  as  is  earned  within  the  state  should 
be  assessed ;  but  since  it  is  exceedingly  difficult  to  ap- 
portion the  expenses  of  a  large  corporation  among  all  its 
branches  in  different  commonwealths,  it  would  seem  prefer- 
able to  adopt  some  approximate  standard  by  which  the  net 
receipts  could  be  measured.  As  the  most  practicable  and 
easily  ascertained  measure  is  gross  receipts,  the  most  ap- 
proved method  of  taxing  corporate  income  would  be  to 
assess  that  proportion  of  the  total  net  income  which  the 
gross  receipts  within  the  state  bear  to  the  entire  gross 
receipts.  Such  a  system  would  present  no  difficulties,  and 
would  preclude  all  chance  of  double  taxation  of  this  kind. 

We  have  thus  far  considered  only  the  question  of  com- 
plications arising  from  international  or  interstate  taxation. 
Of  minor  consequence,  but  still  of  sufficient  importance  to 
deserve  mention,  are  the  problems  of  intermunicipal  double 
taxation.  These  are  of  minor  consequence  because,  in  the 
United  States  at  least,  there  are  but  very  few  instances  of 
i  64  Wis.  130.  a  74  Md.  406. 


THE  TAXATION  OF  CORPORATIONS  239 

municipal  or  county  taxes  on  the  receipts,  income  or  loans 
of  corporations  which  do  any  business  without  the  limits 
of  the  local  divisions.  On  the  other  hand,  we  find  local  taxes 
on  the  total  property  and  on  the  capital  stock  of  corporations 
which  have  more  than  a  purely  local  significance.  The  rules 
should  be  the  same  as  those  applied  above  to  cases  of  interstate 
taxation.  But  so  long  as  very  few  of  the  commonwealths 
accept  these  principles,  it  will  scarcely  surprise  us  to  find  that 
the  local  divisions  almost  completely  ignore  them.  Thus  in 
New  York  City,  the  home  of  many  huge  corporations  of 
national  importance,  it  is  the  common  practice  to  assess  for 
local  purposes  the  entire  capital  stock  of  the  corporation, 
irrespective  of  the  question  whether  a  portion  of  its  property 
may  not  be  situated,  or  whether  its  stock  may  not  be  em- 
ployed or  owned,  outside  of  the  confines  of  the  city.  This 
is  manifestly  a  crude  practice,  whose  injustice  can  be  readily 
removed  by  pursuing  the  plan  here  laid  down  —  i.e.  by 
taxing  corporations  for  local  purposes  only  on  their  real 
estate.  Ultimately,  perhaps,  if  the  local  needs  become  more 
pressing,  a  proportionate  share  of  the  proceeds  of  the  com- 
monwealth corporation  taxes  may  be  distributed  among  the 
local  divisions.  In  this  way  no  possible  complications  could 
arise  from  intermunicipal  double  taxation. 

What  can  we  learn  from  Europe  on  this  whole  subject 
of  interstate  or  intermunicipal  double  taxation  ?  The  only 
countries  in  which  such  interstate  complications  can  arise 
are  the  federal  states  of  Germany,  Austria-Hungary  and 
Switzerland.  In  two  of  these  an  attempt  has  been  made 
to  regulate  the  matter. 

In  Switzerland  the  constitution  of  1874  imposes  on  the 
federal  legislature  the  obligation  of  preventing  double  taxa- 
tion, without  attempting,  however,  to  analyze  or  to  point 
out  the  various  forms  of  double  taxation.1  While  several 

1  Art.  46:  "  Die  Bundesgesetzgebung  wird  .  .  .  gegen  Doppelbesteuerung 
die  erforderlichen  Bestimmungen  treffen."  A  translation  of  the  Swiss  con- 
stitution has  been  published  as  no.  18  of  the  Old  South  Leaflets,  Boston,  1890. 


240  ESSAYS  IN  TAXATION 

decisions  of  the  Swiss  courts  have  definitely  settled  some 
of  the  simpler  problems  of  duplicate  taxation,  the  more 
subtle  questions  that  interest  us  under  this  fourth  head- 
ing have  not  yet  been  adjudicated  to  any  extent.  Beyond 
the  principle  that  corporations,  like  natural  persons,  are 
taxable  on  their  income  and  on  their  property  by  the 
canton  where  their  chief  office  or  establishment  is  situated, 
or  where  their  business  is  conducted,  no  successful  attempt 
has  as  yet  been  made  by  the  federal  legislature  or  courts 
to  solve  the  problems  here  discussed.1  A  few  of  the  cantons, 
however,  have  recently  embodied  in  statutes  the  principle  that 
only  so  much  of  the  capital  or  income  as  is  employed  or  re- 
ceived within  the  commonwealth  should  be  taxable.  Such,  for 
instance,  is  now  the  law  in  Vaud,  Ticino  and  Baselstadt.2  In 
Bern  the  same  principle  is  applied  to  intermunicipal  taxation.3 
In  Uri  the  taxable  property  and  profits  are  calculated  in 
proportion  to  relative  mileage.4  In  Neuchatel  foreign  cor- 

1  Ziircher,  Kritische  Darstellung  der  bundesrechtlichen  Praxis  betreffend 
das  Verbot  der  Doppelbesteuerung  (Basel,  1882),  pp.  88-93 ;  Schreiber  [same 
title],  p.  259.     Of.  also,  in  general,  Speiser,  Das  Verbot  der  Doppelbesteue- 
rung (Basel,  1886). 

2  In  Vaud,  all  individuals  as  well  as  private  corporations  or  societies, 
"  sont  soumis  a  1'impot  pour  tout  le  capital  mobilier  affecte  au  service  de 
leur  activit6  dans  le  canton."     Loi  d'impot  sur  la  fortune  mobiliere  et  sur  la 
fortune  immobiliere,  du  21  aout,  1886,  chap,  iii.,  art.  12.     Printed  in  Schanz, 
Die  Steuern  der  Schweiz,  v.,  p.  387  ;  c/.  also,  iv.,  p.  128.  — In  Ticino,  "  le 
persone,  le  ditte  commercial!,  le  societa  o  gli  enti  morali  in  genere,  che,  non 
avendo  il  loro  domicilio  o  la  loro  sede  nel  Cantone,  vi  tegono  stabilimento, 
succursale,  agenzia,  rappresentanza,  o  vi  esercitano  un'  industria,  oppure  vi 
poseggono  beni  o  rendite  .  .  .  sono  tenuti  al  pagamento  dell'  imposta,  in 
ragione  della  sostanza  e  della  rendita  che  hanno  nel  Cantone."     Legge  sull' 
imposta  cantonale  (April  28,  1890),  art.  14.     In  Schanz,  v.,  p.  462.  —  In 
Baselstadt,  "  bei  Gesellschaften  welche  neben  der  Niederlassung  im  Kanton 
auch  eine  solche  ausserhalb  des  Kantons  besitzen,  tritt  eine  dem  Umfange 
der  auswartigen  Niederlassung  entsprechende  Minderung  des  Steuerbetrags 
ein."      Gesetz  betreffend  die  Besteuerung  der  anonymen  Erwerbsgesell- 
schaften,  vom  14  Oktober,  1889,  §  4.     In  Schanz,  v.,  p.  50. 

8  "  Bei  Unternehmungen,  die  in  verschiedenen  Gemeinden  ihr  Gewerbe 
ausuben,  ist  die  Steuer  nach  Verhaltniss  der  Ausdehnung  des  Geschafts  an 
diese  Gemeinden  zu  entrichten."  Gesetz  iiber  das  Steuerwesen  in  den 
Gemeinden,  vom  2  Sept.,  1867,  §  7.  In  Schanz,  v.,  p.  88. 

4  Uri,  Steuergesetz  vom  10  Mai,  1886,  art.  13.    In  Schanz,  v.,  p.  376. 


THE  TAXATION  OF  CORPORATIONS  241 

porations  are  taxable  only  for  the  profits  earned  within 
the  commonwealth.1  In  Appenzell  it  is  provided  that 
corporations  should  pay  the  income  tax  in  the  place 
where  the  business  is  carried  on,  but  in  such  a  manner 
as  to  avoid  double  taxation.2  The  recent  law  of  Ticino 
is  most  interesting  for  the  further  reason  that  it  also 
imposes  a  tax  on  all  corporate  loans,  but  allows  the  corpora- 
tion to  deduct  the  tax  only  from  the  interest  on  the  bonds 
owned  within  the  canton.3  Foreign-held  bonds  thus  escape 
taxation  in  the  hands  of  the  individual  holder  except  by 
the  state  of  the  owner's  residence.  It  will  be  observed  that 
the  custom  in  Ticino  is  thus  the  exact  reverse  of  the  prac- 
tice in  the  United  States. 

In  Germany,  the  conditions  are  much  the  same.  In  1870, 
an  imperial  law  was  enacted  which  forbade  in  express 
terms  double  taxation  arising  from  interstate  complications. 
This  law  provided  that  individuals  should  be  taxed  by 
the  state  of  their  domicile,  and  that  real  estate  should  be 
taxable  by  the  state  of  its  location.  The  only  clause  affect- 
ing corporations  prescribed  that  the  occupation  as  well  as 
the  income  from  the  business  could  be  taxed  only  by  the  state 
where  the  business  was  carried  on.4  The  commission  which 
drafted  the  law,  however,  evaded  the  main  question  by  assert- 
ing that  the  exact  proportion  of  the  corporate  business  or  in- 
come taxed  by  any  one  state  must  depend  on  "  the  particular 

1  "Les  socifitfis  anonymes  .  .  .  sont  soumises  au  meme  impot  pour  lea 
ressources  que  leur  procurent   les   affaires  faites  dans  le  pays."     Loi  sur 
1'impot  direct  du  18  octobre,  1878,  art  6,  §  3.     In  Schanz,  v.,  p.  219. 

2  "  Immerhin  unter  Vermeidung  von  Doppelbesteuerung. "     Vollziehungs- 
verordnung  fiber  die  Ausftihrung  von  Art.  16  der  Verfassung  betreffend  das 
Steuerwesen  (April  5,  1880),  art.  6.     In  Schanz,  v.,  p.  26. 

3  The  corporations  "sono  tenuti  al  pagamento  dell'  imposta  .  .  .  sull' 
importo  complessivo  delle  obbligazioni  al  portatore  da  loro  emesse."     But 
the  law  contains  this  further  provision:  "Non  saranno  colpiti  dalP  imposta 
i  capitali  [including  the  bonds]  di  cui  .  .  .  ove  il  contribuente  dimostri  che 
ci6  costituirebbe  una  doppia  imposta."  .  .  .   Arts.  15  and  3,  §  3  of  the  law  of 
1890.     In  Schanz,  v.,  pp.  460,  462 ;  cf.  iv.,  p.  282. 

*  Reichsgesetz  wegen  Beseitigung  der  Doppelbesteuerung ;  vom  13  Mai, 
1870,  §  3.  Reprinted  in  Meitzen,  Die  Vorschriften  uber  die  Klassen-  und 
klassifizierte  Einkommensteuer  in  Preussen,  no.  6. 


242  ESSAYS  IN  TAXATION 

form  of  the  actual  conditions."1  This  has  settled  nothing, 
and  the  matter  remains,  as  before,  a  subject  for  the  separate 
states  to  regulate. 

Several  of  the  German  commonwealths  have  now  adjusted 
the  difficulties  in  very  much  the  same  way  that  has  been 
adopted  or  proposed  in  various  American  states.  Thus  the 
Baden  law  provided  that  only  so  much  of  the  corporate 
income  shall  be  assessed  as  is  proportional  to  the  amount 
of  capital  employed  within  the  state.2  So  the  earlier  Prus- 
sian law  provided  that  the  taxable  net  income  of  railroads 
which  lie  partly  in  other  states  should  be  estimated  by  the 
proportion  of  gross  receipts  within  the  state,  and  that  this 
again  should  be  calculated  according  to  mileage.3  The 
Prussian  local  tax  law  of  1885  measures  the  proportion  of 
corporate  income  or  net  profits  due  to  each  tax  district  by 
the  share  of  gross  receipts  in  the  case  of  banks  and  insurance 
companies,  and  by  the  share  of  expenses  for  salaries  and 
wages  in  the  case  of  transportation  companies.4  The  income- 
tax  law  of  1891  states  that  only  that  part  of  the  net  receipts 
actually  earned  in  Prussia  shall  be  taxable.6 

The  tendency  therefore  seems  to  be  the  same  in  all  coun- 
tries. Whether  the  tax  be  imposed  on  property  or  on  income, 
the  law  should  be  applicable  to  both  domestic  and  foreign 
corporations ;  and  while  no  deduction  should  be  made  for 
non-resident  holders  of  stock  or  bonds,  only  so  much  of  the 
property  or  income  should  be  assessed  as  is  employed  or  re- 
ceived within  the  state.  Since  an  exact  standard  is  unattain- 

1  "  Dass  die  Entscheidung  immer  von  der  besonderen  Gestaltung  der 
thatsachlichen  Verhaltnisse  abhangen  werde."     Of.  Clauss,  "Das  Reichs- 
gesetz  wegen  Beseitigung  der   Doppelbesteuerung,"  in  Schanz's  Finanz- 
Archiv,  v.,  pp.  138-197,  especially  p.  179. 

2  Badisches  Einkommensteuergesetz  von  20  Juni,  1884,  art.  5,  lit.  B.    In 
Finanz-Archiv,  iii.,  p.  308. 

8  Law  of  March  16,  1867,  §  9.  For  the  judicial  decisions  and  rescripts  on 
this  point,  see  Clauss,  op.  cit.,  p.  181. 

*  Coinmunalsteuernothgesetz  von  27  Juli,  1885,  §  7.  Printed  in  Finanz- 
Archiv,  iii.,  pp.  174-193,  together  with  an  explanatory  article  by  Secretary 
Herrfurth. 

6  Einkommensteuergesetz  von  24  Juni,  1891,  §  16. 


THE  TAXATION1  OF  CORPORATION'S  243 

able,  it  is  advisable  to  use  the  approximate  test  of  relative 
mileage  in  the  case  of  transportation  companies  and  of  rela- 
tive gross  receipts  in  the  case  of  other  corporations. 

V.    Taxation  of  the  Corporation  and  of  the  Security  Holder. 

We  come  finally  to  the  fifth  and  most  important  division 
in  the  subject  of  duplicate  taxation  —  the  taxation  of  the 
corporation  and  of  the  shareholder  or  bondholder.  The 
question  is  :  If  we  tax  the  corporation,  shall  we  also  tax  the 
individual  who  owns  the  stock  or  bonds  of  the  corporation  ? 
Is  this  double  taxation?  Is  it  unjust? 

Let  us  first  discuss  the  actual  practice  both  here  and  abroad. 
In  the  United  States  the  legal  conditions  are  absolutely  lack- 
ing in  uniformity.  In  some  states  the  tax  on  the  corporation 
is  declared  to  be  a  tax  on  the  shares,  which  are  accordingly 
exempted  from  assessment.  Thus  in  California,  the  statute 
declares  that  "  shares  of  stock  possess  no  intrinsic  value  over 
and  above  the  actual  value  of  the  property  of  the  corporation 
for  which  they  stand,"  and  that  to  tax  both  corporation  and 
shareholder  is  double  taxation.1  In  Arizona,  we  find  exactly 
similar  language  used.2  In  most  of  the  other  common- 
wealths, also,  shares  of  stock  in  the  hands  of  individuals  are 
exempt  when  the  corporation  itself  is  taxed,  although  the 
reason  of  the  rule  is  not  always  expressly  stated  as  in  the 
cases  just  cited.3 

On  the  other  hand,  the  statutes  in  North  Carolina, 
Wyoming  and  Iowa  (except  for  manufacturing  corporations) 
and  the  judicial  decisions  in  Illinois,  Iowa,  Louisiana  and 
Maine  are  to  the  contrary  effect.4  This  was  formerly  true 

1  Cal.  Code,  §  3608,  new  sec.  March  7,  1881;  cf.  Burke  vs.  Badlam,  57 
Cal.  594  ;  21  Fed.  Kep.  539  ;  22  Fed.  Rep.  602. 

2  Ariz.  Code,  §  2633. 

8  For  details,  see  the  chapter  in  Pepper  and  Lewis,  A  System  of  the  Law 
of  Private  Corporations,  mentioned  above  on  j .  137. 

*  Porter  vs.  Railroad  Co.,  76  111.  561 ;  Danville  Banking  Co.  vs.  Parks,  88 
111.  170  ;  Cook  vs.  Burlington,  59  la.  251  ;  New  Orleans  vs.  Canal  Co.,  32  La. 
Ann.  51  ;  Cumberland  Marine  Railroad  vs.  Portland,  37  Me.  444. 


244  ESSAYS  IN  TAXATION 

also  in  Indiana,  Pennsylvania  and  Tennessee.1  In  some 
of  these  cases  it  has  been  held  that  "the  tangible  property 
of  a  corporation  and  the  shares  of  stock  are  separate  and 
distinct  kinds  of  property  under  different  ownership  ;  the 
first  being  the  property  of  the  corporation  and  the  last  the 
property  of  the  individual  stockholder."  Taxation  of  both 
corporation  and  shares  of  stock  is  hence  pronounced  neither 
duplicate  nor  unjust  taxation,  even  though  the  shares  of 
stock  have  no  value  save  that  which  they  derive  from  the 
corporate  property  and  franchise.2  In  other  cases  again,  it 
has  been  held  that  even  though  the  taxes  amount  to  double 
taxation,  they  are  not  unconstitutional.  This,  however,  is 
true  only  in  those  states  which  admit  double  taxation,  as 
Pennsylvania  formerly  did,  even  though  it  be  confessedly 
unequal. 

Other  commonwealths,  again,  take  a  less  logical  middle 
ground.  In  the  case  of  certain  corporations  they  do  not 
permit  taxation  of  both  shares  and  corporation ;  in  the  case 
of  other  corporations  they  do  not  object  to  this  simultaneous 
taxation.  In  the  case  of  national  banks,  as  we  know,  the 
taxation  of  the  corporation  itself  is  made  impossible  by  fed- 
eral law.  Most  of  the  states,  therefore,  tax  only  the  indi- 
vidual shares,  although  they  collect  the  tax  through  the 
corporation.3  In  many  cases  this  system  has  been  extended 
to  other  banks  besides  national  banks.  A  few  common- 
wealths (Delaware,  Georgia,  Kansas  and  North  Carolina) 
pursue  this  method  with  regard  to  all  corporate  shares  in 
general,  and  collect  the  tax  from  the  corporation.4  In 

1 15  Ind.  150 ;  49  Pa.  State  526  ;  66  Pa.  State  77  ;  47  Pa.  State  106.  But  it 
has  been  recently  held  in  Pennsylvania  that  double  taxation  will  not  be  sup- 
ported except  by  express  enactment.  156  Pa.  State  488  ;  151  Pa.  State  265 
and  276 ;  139  Pa.  State  612. 

2  So  also  in  Switzerland  this  simultaneous  taxation  has  been  upheld  on 
the  strictly  juristic  ground  that  the  corporation  and  the  shareholder  are  dis- 
tinct persons.  See  Speiser,  Das  Verbot  der  Doppelbesteuerung,  and  Roguin, 
La  Eegle  de  Droit  (Lausanne,  1889),  141  and  passim. 

8  See  supra,  pp.  148,  149. 

4  Del.  Laws,  13,  chap.  393  ;  Ga.  Code,  sec.  815  ;  Kan.  Comp.  Laws,  chap. 
107,  sec.  6 ;  N.  C.  Machinery  Act  of  March  11,  1889,  sec.  A  6. 


THE  TAXATION  OF  CORPORATIONS  245 

a  few  others,  including  Iowa,  Kentucky  and  Vermont,  the 
prohibition  of  simultaneous  taxation  of  both  shareholder 
and  corporation  applies  only  to  definite  classes  of  corpora- 
tions.1 In  Ohio  it  is  true  only  of  domestic  corporations. 
In  Massachusetts  domestic  corporations  are  taxed  and  the 
individual  shareholders  are  exempt  as  regards  all  dues  except 
those  for  school-district  and  parish  purposes.2 

The  decisions  of  the  United  States  Supreme  Court  are 
somewhat  conflicting.  The  earlier  cases  seem  to  uphold 
simultaneous  taxation  of  corporation  and  of  shareholder.  In 
a  late  case,  however,  the  court  asserts  that  double  taxation  is 
never  to  be  presumed ;  and  that,  although  the  common- 
wealths have  an  undoubted  right  to  levy  such  taxes,  in  the 
absence  of  a  special  statutory  provision  the  presumption  is 
against  such  an  imposition.3  On  this  point,  accordingly,  we 
find  an  absolute  contradiction  of  theory. 

In  a  cognate  matter  there  is  a  still  greater  diversity  of 
practice.  Some  commonwealths,  as  we  have  just  seen, 
tax  the  stockholders  on  the  full  value  of  their  shares, 
irrespective  of  the  question  whether  the  corporation  has 
been  taxed  or  not.  In  other  states,  however,  only  a  por- 
tion of  the  value  of  the  shares  is  taxable.  Thus  in 
Louisiana,  Minnesota  and  Nebraska,  in  the  assessment  of 
shares  of  stock  to  the  holders,  a  proportionate  part  of  the 
value  of  the  real  and  personal  corporate  property  taxed 
within  the  state  is  deducted  from  each  share.*  In  New 
Hampshire  and  Tennessee,  a  proportionate  part  of  the  real 

1  In  Iowa  the  prohibition  applies  only  to  manufacturing  companies,  Acts 
18th  Gen.  Assembly,  chap.  57,  §§  1,  2  ;  in  Kentucky  to  turnpike,  gas,  tele- 
graph, telephone,  express,  street-railway  and  toll-bridge  companies,  Revenue 
Law  of  1886,  chap.  1223,  art.  iv.,  §  8 ;  in  Vermont  to  railroads,  Rev.  Laws, 
sec.  270. 

2  Mass.  Pub.  Stat. ,  chap,  xi.,  sec.  4. 

8  Tennessee  vs.  Whitworth,  117  U.  S.  136,  137  ;  also,  New  Orleans  vs. 
Houston,  119  U.  S.  265.  For  the  earlier  cases,  see  Van  Allen  vs.  Assessors, 
3  Wall.  573  ;  The  Delaware  Railroad  Tax  Case,  18  Wall.  230 ;  Farrington 
vs.  Tennessee,  95  U.  S.  686  ;  Sturges  vs.  Carter,  114  U.  S.  611. 

*  La.  Acts  of  1888,  no.  85,  sec.  27 ;  Minn.  Gen.  Stat.,  chap.  xi. ;  Neb.  Act 
of  March  1,  1879,  sec.  32. 


246  ESS AFS  IN  TAXATION 

estate  actually  taxed  is  deducted  from  each  share.1  In  Rhode 
Island,  a  proportionate  part  of  the  real  estate  and  machinery 
is  deducted.2  In  Maine,  a  proportionate  part  of  the  ma- 
chinery, goods  manufactured  or  unmanufactured,  and  real 
estate  locally  taxable  is  deducted.3  Finally,  in  New  York, 
the  statute  (which  applies,  however,  only  to  state  and  na- 
tional banks)  provides  for  the  deduction  of  the  assessed 
value  of  the  real  estate.*  In  all  these  cases  only  the  prop- 
erty actually  taxable  within  the  state  is  deducted.  In  Ver- 
mont, on  the  other  hand,  in  the  case  of  manufacturing 
companies  the  value  of  the  corporate  realty  and  personalty, 
and  in  the  case  of  all  other  corporations  the  value  of  the 
realty,  is  deducted  whether  the  property  be  located  or  taxa- 
ble within  or  without  the  commonwealth.6 

A  somewhat  analogous  question  is  that  of  the  taxation  of 
the  shares  of  foreign  corporations  in  the  hands  of  individual 
residents.  All  those  states  which,  as  we  have  seen,  declare 
it  to  be  justifiable  to  tax  both  corporation  and  shareholder, 
of  course  do  not  hesitate  to  tax  the  shares  held  by  resi- 
dents, even  though  the  foreign  corporation  itself  be  taxed. 
There  is  here,  therefore,  no  discrimination  between  domestic 
and  foreign  corporations.  The  other  states  which  declare 
the  simultaneous  taxation  of  corporation  and  shareholder 
to  be  duplicate  taxation,  may  be  divided  into  two  classes. 
Some  of  them  exempt  the  shares  held  by  residents  in  foreign 
corporations,  but  only  when  the  foreign  corporations  them- 
selves are  actually  taxed  by  the  state  of  their  residence.  This 
is  the  rule  in  New  York,  in  almost  all  of  New  England  and  in  a 
few  other  states,  like  California,  Louisiana  and  New  Jersey.6 

1  N.  H.  Gen.  Stat.,  chaps.  53-65  ;  Tenn.  Laws,  1868-69,  chap.  9,  sec.  9. 

2  R.  I.  Pub.  Stat.,  chap.  43,  sec.  12. 
8  Me.  Rev.  Stat.,  tit.  i.,  sec.  14,  §  3. 

*  N.  Y.  Laws  of  1866,  chap.  761 ;  Laws  of  1882,  chap.  409,  §  312.  Cf.  Peo- 
ple vs.  Commissioners  of  Taxes,  69  N.  Y.  91. 

5  Vt.  Rev.  Laws,  tit.  9,  chap.  22,  sec.  288.  Cf.  on  this  point,  Moore,  "  Cor- 
porate Taxation,"  in  American  Law  Review  for  1884,  p.  771.  Moore's 
statements  are  not  entirely  accurate. 

«  Hoyt  vs.  Commissioners,  23  N.  Y.  224  (1861)  ;  N.  H.  Gen.  Laws  1878, 
chap.  53,  sec.  6 ;  Vt.  Rev.  Stat.,  tit.  ix.,  chap.  12,  sec.  270 ;  R.  I.  Pub.  Stat., 


THE  TAXATION  OF  CORPORATIONS  247 

Some  states,  however,  like  Massachusetts,  make  a  distinc- 
tion between  foreign  and  domestic  corporations,  exempting 
the  shareholders  of  domestic  corporations  (or  taxing  them  only 
through  a  simple  tax  on  the  corporation  itself),  but  assessing 
the  shareholders  of  foreign  corporations  on  their  shares. 
This  practice  has  given  rise  to  considerable  controversy  ; l 
but  from  the  standpoint  of  justice  in  taxation  it  can  be  de- 
fended only  to  a  very  limited  extent.  According  to  the 
principle  of  relative  economic  interests,  the  shareholder  of 
a  foreign  corporation  is  indeed  under  a  certain  obligation 
to  support  the  state  of  his  residence.  The  proper  way  to 
satisfy  the  conflicting  claims  is,  however,  to  have  the  foreign 
state,  which  taxes  the  corporation,  divide  the  tax  according 
to  some  agreement  with  the  state  where  the  stockholder 
resides.  To  tax  the  shareholder  when  the  foreign  state 
already  taxes  the  corporation  seems  inadmissible  ;  while  en- 
tirely to  exempt  the  shareholder  is  unfair  to  the  state  of  his 
residence.  Some  modus  vivendi  ought  to  be  arranged;  but  so 
long  as  it  does  not  exist,  the  New  York  rule  should  be  followed. 

Such  is  the  situation  in  regard  to  shares  of  stock.  The 
same  question  can,  of  course,  arise  in  reference  to  mortgage 
bonds.  As  regards  the  simultaneous  taxation  of  corporate 
property  and  the  individual  bondholder,  the  disagreement 
is  less  profound  only  because  corporate  loans  are,  as  we 
know,  rarely  taxed.  In  the  one  commonwealth,  Connecticut, 
where  certain  corporations  pay  what  has  been  pronounced 
a  property  tax  on  the  value  of  their  stocks  and  bonds, 
it  has  been  held  not  to  be  double  taxation  to  assess  the 
individual  bondholder  as  well  as  the  corporation.2  Yet 

chap.  42,  sec.  10 ;  N.  J.  Revis.  1877,  p.  116,  sec.  64.  Cf.  Smith  vs.  Ra,m- 
sey,  25  Vroom,  546  (1893);  Lockwood  vs.  Weston,  61  Ct.  211  (1891);  City 
of  San  Francisco  vs.  Mackey,  22  Fed.  Rep.  602. 

1  This  has  been  the  law  since  1836.  But  up  to  1866  taxes  paid  on  Massa- 
chusetts real  estate  and  machinery  by  the  foreign  corporation  were  deducted 
from  the  tax  on  the  shareholder.  Mass.  Rev.  of  1836,  chap.  7,  sees.  2,  4  ; 
Dwight  vs.  Boston,  12  Allen  316.  Cf.  Crocker,  The  Injustice  and  Inexpe- 
diency of  Double  Taxation,  1892 ;  R.  H.  Dana,  Double  Taxation  Unjust 
and  Inexpedient,  1892.  2  Bridgeport  vs.  Bishop,  33  Conn.  187. 


248  ESSAYS  IN  TAXATION 

Pennsylvania  and  Maryland  come  to  the  opposite  conclu- 
sion, so  far  as  the  bonds  in  these  commonwealths  are  taxable 
only  to  the  corporation  and  not  to  the  individual  bond- 
holder;1 for  in  these  states  neither  stockholder  nor  bond- 
holder is  liable.  The  federal  Supreme  Court  virtually 
accepts  the  same  principle  in  deciding  that  a  tax  on  the 
bonds  is  a  tax  on  the  bondholder,2  the  corporation  being 
used  merely  as  a  convenient  means  of  collecting  the  tax. 
It  may  be  confidently  asserted,  therefore,  that  so  soon  as  the 
taxation  of  corporate  loans  becomes  as  general  as  is  now  the 
taxation  of  corporate  stock,  we  shall  be  confronted  by  pre- 
cisely the  same  difficulties. 

If  we  turn  to  Europe,  we  shall  find  a  still  greater 
diversity  of  practice.  Of  the  European  countries,  Switzer- 
land is  the  only  one  in  which  some  of  the  cantons  still  tax 
corporate  property  or  capital  stock ;  and  in  Switzerland  the 
condition  is  just  as  chaotic  as  with  us.3  Thus  one  set  of 
cantons  (Glarus,  Grisons,  Baselstadt,  Aargau  and  Ticino) 
formerly  taxed  only  the  shareholder.4  The  inter  cantonal 
complications,  however,  soon  assumed  important  proportions; 
for  it  frequently  occurred  that  the  great  majority  of  the 
shareholders  resided  in  a  different  canton  from  the  home 
of  the  corporation,  to  the  manifest  detriment  of  the  pub- 
lic revenue  in  the  latter.  Owing  to  this  fact,  the  above 
system  has  now  been  abandoned  by  all  the  cantons  except 
Glarus. 

A  second  set  of  cantons,  which  tax  the  corporate  property 
and  income,  deduct  the  shares,  dividends  or  interest  in  the 

1  Pa.  law  of  June  30,  1885,  §  4  ;  Md.  Rev.  Code,  art.  xi.,  sec.  97.     Before 
the  corporation-tax  law  of  1880,  the  same  principle  applied  to  all  corporations 
in  New  York. 

2  State  Tax  on  Foreign-held  Bonds,  16  Wall.  300. 

8  Cf.  in  general,  Schanz,  Die  Steuern  der  Schweiz,  i.,  pp.  90-99;  and 
Ziircher,  Kritische  Darstellung  betreffend  das  Verbot  der  Doppelbesteuerung, 
pp.  36-41. 

4  This  was  true  in  Grisons  from  1871  to  1881 ;  in  Baselstadt  up  to  1879  ; 
in  Aargau  to  1885  ;  in  Ticino  to  1890.  See  the  respective  laws  in  Schanz, 
op.  cit.,  iii.,  p.  247  ;  ii.,  p.  40 ;  v.,  p.  4,  §  20  ;  iv.,  p.  281.  For  Glarus,  see 
ibid.,  v.,  p.  176. 


THE  TAXATION  OF  CORPORATIONS  249 

hands  of  the  security  holders  of  domestic  corporations 
from  this  taxable  property  or  income.  Such  is  the  law 
in  Schaffhausen,  Bern,  Vaud,  Aargau  and  Uri,1  and  is 
the  practice  in  Baselstadt,  Schwyz  and  Zug.2  The  security 
holders  of  foreign  corporations  are,  however,  not  exempted 
from  taxation.  Grisons,  moreover,  has  the  curious  provision 
that  while  corporations  are  taxed  directly,  only  the  share- 
holders of  domestic  corporations  are  exempt,  the  bondholders 
of  both  domestic  and  foreign  corporations  being  taxable 
equally  with  the  corporation.3  In  some  of  the  above  cantons, 
as  in  Uri,  Bern  and  Aargau,  the  security  holders  are  exempt 
only  from  commonwealth  taxes,  but  are  liable  for  local 
burdens.4  It  is  the  same  system,  it  will  be  observed,  as  m 
Massachusetts. 

A  third  set  of  cantons  do  not  shrink  from  double  taxation, 
but  tax  both  corporation  and  shareholder.  Such  is  the  law 
in  Baselstadt  and  Neuchatel.6  On  this  point  the  decisions 
of  the  Federal  Council  are  contradictory.6  Finally,  a  fourth 

1  Schaffhausen,  Steuergesetz  vom  29  Sept.  1879,  arts.  9  and  10,  in  Schanz, 
v.,  p.  259  ;  ii.,  p.  169 ;  Bern,  Vollziehungsordnung,  vom  22  Marz,  1878,  §  3, 
in  Schanz,  v.,  p.  83  ;  Vaud,  loi  d'impot  sur  la  fortune  mobiliere  du  21  aout, 
1862,  art.  6,  in  Zurcher,  op.  cit.,  p.  38,  r/.  Schanz,  iv.,  p.  158  (true  only  to  1886) ; 
Aargau,  Grossratliche  Verordnung  tiber  den  Bezug  der  direkten  Staats-  und 
Gemeindesteuer,  vom  26  November,  1885,  §  7,  in  Schanz,  v.,  p.  15 ;  Uri, 
Steuergesetz  vorn  10  Mai,  1886,  art.  5,  in  Schanz,  v.,  p.  375. 

2  For  these  cantons,  see  the  judicial  decisions  in  Zlircher,  op.  cit.,  p.  38. 

8  Graubunden,  Steuergesetz  vom  28  August,  1881,  §  16 ;  hi  Schanz,  v., 
p.  192. 

*  See  the  respective  provisions  in  Schanz,  v.,  p.  375,  art.  5 ;  88,  §  7;  15,  §  7; 
and  19,  §  18. 

6  Bern,  Gesetz  betreffend  die  direkten  Steuern,  vom  31  Mai,  1880,  §§  1,8; 
and  Gesetz  betreffend  die  Besteuerung  der  anonymen  Erwerbsgesellschaften, 
vom  14  Oct.,  1889,  §  1 ;  in  Schanz,  v.,  pp.  41,  43,  49 ;  Neuchatel,  Loi  sur 
1'impot  direct  du  18  Oct.,  1878,  art.  5  and  art.  6,  §  3  ;  in  Schanz,  v.,  pp.  218, 
219.  Schanz,  i.,  p.  95,  also  includes  Zug  in  this  class,  but  erroneously,  aa 
appears  from  the  official  decision  quoted  in  ZUrcher,  op.  cit.,  p.  38. 

6  See  the  several  cases  in  Schreiber,  Verbot  der  Doppelbesteuerung,  pp. 
199-202.  He  opposes  double  taxation.  On  the  other  hand,  see  Meili, 
"  Rechtsgutachten  tiber  die  Besteuerung  der  Aktiengesellschaften,"  in  the 
Zeitschrift  fur  schweizerische  Gesetzgebung,  v.,  p.  489.  See  also  Ztircher, 
op.  cit.,  p.  40. 


250  ESSAYS  IN  TAXATION 

set  —  and  this  seems  the  growing  tendency  in  Switzer- 
land—  seek  to  divide  the  tax  between  corporation  and 
shareholder.  Thus  Geneva  taxes  the  corporation  on  its 
realty  and  the  shareholder  on  his  shares ;  but  does  not 
permit  the  shareholder  to  make  a  proportionate  reduction 
for  the  corporate  realty  already  taxed,  as  is  the  case  in 
New  York,  New  Hampshire  and  Tennessee.1  Appenzell 
taxes  the  shareholders  on  the  market  value  of  their  shares, 
but  the  corporations  only  on  their  reserve  funds.2  In  Zurich, 
the  shareholders  are  taxed  on  their  shares ;  the  corporations 
on  their  reserve  fund  and  income  in  excess  of  five  per  cent  of 
the  capital.  The  income  below  five  per  cent  is  not  taxed 
because  it  is  supposed  to  be  hit  by  the  tax  on  the  share- 
holders. For  purposes  of  local  taxation,  however,  the  share- 
holders are  assessed  on  their  shares,  but  the  corporations 
pay  only  on  their  realty  and  on  a  proportionate  part  of  their 
reserve  funds.3 

The  recent  "  draft  of  a  federal  law  on  double  taxation " 
sought  to  divide  the  tax  between  corporation  and  shareholder 
in  a  new  way.  The  stockholder  was  to  be  assessed  by  the  place 
of  his  domicile  on  the  market  value  of  his  shares  up  to  the 
amount  actually  paid  or  on  the  dividends  up  to  five  per  cent ; 
while  the  corporation  was  to  pay  only  on  the  value  of  the 
capital  or  dividends  above  this  figure.4  Although  this  particu- 
lar draft  failed  of  adoption  because  of  the  jealousy  of  the  indi- 
vidual cantons  at  the  supposed  infringement  of  their  state 
rights,  the  principle  has  nevertheless  been  accepted  by  a  single 
commonwealth,  —  Vaud.  In  this  canton  all  shares  which 

1  Geneve,  Loi  generale  sur  les  contributions  publiques,  du  9  novembre, 
1887,  arts.  300,  324 ;  in  Schanz,  v.,  pp.  151,  155. 

2  Vollziehungsverordnung  iiber  die  Ausf  iihrung  von  Art.  16  der  Verfassung 
betreffend  das  Steuerwesen  (April  5,  1880),  arts.  5,  6.     Schanz,  v.,  p.  26. 

8  Gesetz  betreffend  die  Vermogens-,  Einkommen-  und  Aktivbiirgersteuer 
vom  24  April,  1870,  §§  2,  4  ;  Anleitung  betr.  das  bei  der  Selbsttaxation  .  .  . 
zu  beobachtende  Verfahren,  §  6  ;  Gesetz  betreffend  das  Gemeindewesen, 
§  137,  d,  e.  Schanz,  v.,  pp.  423,  424,  431,  439  ;  ii.,  p.  435.  Cf.  Ztircher,  op. 
cit.,  p.  39. 

*  Bundesgesetzentwurf  vom  6  Marz,  1885.     In  Schanz,  i.,  p.  96. 


THE  TAXATION  OF  CORPORATIONS  251 

stand  above  par  and  all  bonds  which  pay  more  than  four  per 
cent  interest  are  assessable  to  the  individual  owners  at  their 
par  value.  The  corporations  are  assessed  only  on  the  surplus 
above  the  capital  stock,  i.e.  the  reserve  and  sinking  funds 
and  other  sums  earned  during  the  year.1  Such  a  clumsy 
method  is  not  likely  to  be  adopted  in  this  country.  On  the 
other  hand,  in  St.  Gallen  the  stockholder  is  taxed  on  his 
shares,  the  corporation  on  its  income  in  excess  of  four  per 
cent  interest  on  the  capital.2  We  see,  then,  that  Switzerland 
has  no  settled  practice. 

In  the  other  chief  European  countries  neither  general  prop- 
erty nor  capital  stock  is  taxed.  The  whole  system  is  that 
of  the  taxation  of  incomes.  The  same  questions  arise  as  to 
the  taxation  of  corporate  profits  and  of  shareholders'  or  bond- 
holders' income. 

In  England,  the  income  tax  payable  on  annual  profits  or 
gains  according  to  schedule  D  of  the  income  tax  is  ad- 
vanced by  the  corporation,  and  is  deducted  by  it  from  the 
dividends  or  interest  due  the  security  holders,  who  are 
then  to  that  extent  exempt  from  the  income  tax.8  In 
Austria  the  facts  are  similar  to  those  in  England.*  In 
Italy,  the  law  requires  the  income  tax  to  be  paid  by  the 
corporation,  but  does  not  interfere  with  the  adjustment  of 
the  tax  between  the  company  and  the  shareholders.  Nothing 

1  "Les  actions  et  parts  de  societes  qui  out  leur  sifige  en  Suisse  et  dont  le 
cours  a  la  bourse  est  supfirieur  a  leur  valeur  nominate  ou  qui  rapportent  un 
interet  superieur  au  4  per  cent  de  cette  valeur,  sont  comptees  dans  la  fortune 
mobiliere  du  porteur  ou  des  crSanciers  pour  leur  valeur  nominate  seulement. 
.  .  .  L'avoir  net  (reserves  et  amortissements  compris)  des  socifites  ...  est 
coinpte  dans  la  fortune  mobiliere  de  ces  soci6tes  pour  tout  ce  qui  excede  le 
capital  social."      Loi  d'hnpot  sur  la  fortune  mobiliere,  etc.,  du  21  aofit, 
1886,  art.  11.     Schanz,  v.,  p.  387  ;  iv.,  p.  168. 

2  Gesetz  iiber  die  Einkommensteuer,  sowie  tiber  die  Besteuerung  der 
anonymen  Gesellscnaften  (1863),  art.  6;  Verordnung  liber  Besteuerung  der 
anonymen  Gesellschaften  vom  28  Jan.,  1867,  arts.  4,  11.     Schanz,  v.,  pp. 
309,  311. 

8  Ellis,  A  Guide  to  the  Income  Tax  Acts,  pp.  78-112. 

4  Wagner,  "Direkte  Steuern,"  §  103,  in  Schonberg,  Handbuch  der  poli- 
tischen  Oekonomie,  iii.,  p.  307.  Wagner's  discussion  of  these  points  is 
fragmentary  and  inconclusive. 


252  ESSAYS  IX  TAXATION 

would  prevent  the  corporation  from  deducting  the  tax  from 
the  dividends ;  but  in  fact,  it  is  the  custom  for  the  corpora- 
tion to  charge  the  tax  to  expense  account,  with  the  same 
result  for  the  shareholder.  The  latter  is  not  assessable  on 
his  dividends  because  the  law  expressly  forbids  double  tax- 
ation of  this  kind.1  As  regards  bondholders  the  companies 
are  required  to  pay  the  tax  on  coupons,  with  a  right  to  recoup 
from  the  bondholders.2  The  companies  generally  do  not 
deduct  anything  from  the  coupons,  but,  as  with  dividends, 
charge  the  tax  to  expense  account.  In  this  case  it  would 
seem  as  if  the  stockholders  were  liable  for  the  tax,  since, 
strictly  speaking,  it  would  have  to  come  ultimately  out  of 
the  stockholders'  dividends,  and  not  out  of  the  bondholders' 
interest,  which  is  legally  fixed.  In  actual  practice,  how- 
ever, this  distinction  is  not  observed.  The  bondholders, 
moreover,  are  not  assessable  if  the  corporation  has  paid  the 
tax.  In  France,  the  tax  sur  le  revenu  des  valeurs  mobilieres, 
so  far  as  it  applies  to  the  dividends  or  interest  of  corporate 
securities,  may  be  primarily  collected  from  the  company  and 
then  deducted  by  it  from  the  sums  due  the  security  holders, 
as  in  England ;  or  the  tax  may  be  assumed  directly  by  the 
companies,3  as  in  Italy. 

In  Germany,  every  possible  plan  has  been  tried,  with- 
out reaching  any  definite  or  uniform  conclusions.  The 
matter  is,  moreover,  further  complicated  by  the  fact  that 
corporations  like  individuals  must  pay  a  business  tax 
(Grewerbesteuer^))  somewhat  akin  to  licenses  or  occupation 

1  "  Ne  saranno  soltanti  eccettuati  [in  the  taxable  income]  i  redditi  che  per 
disposizione  della  presente  legge  siano  gia  una  volta  assoggettati  all'  imposta 
in  essa  stabilita."     Legge  per  1'  imposta  sui  redditi  di  ricchezza  mobile,  art. 
8,  §2. 

2  " .  .  .  Le  societa  anonime  dichiareranno  non  solo  i  redditi  propri,  ma 
eziando  .  .  .  gli  interessi  dei  debit!  da  loro  contratti  e  delle  obbligazioni  da 
loro  emesse,  e  pagheranno  direttamente  1'  imposta  relativa  anche  a  questi 
ultimi  redditi,  rivalendosene  sui  loro  assegnatori  e  creditor!  mediante  rite- 
nuta."    Ibid.,  art.  15. 

3  Tanqu&rey,  Traite  .  .  .  deVImpotsur  leSevenudes  Valeurs  Mobilieres, 
pp.  143-150  ;  Vignes,  Traite  des  Impots  en  France,  i.,  pp.  405-409 ;  Kauft- 
mann,  Die  Finanzen  Frankreichs,  pp.  288,  291. 


THE  TAXATION  OF  CORPORATION'S  253 

taxes  in  the  Southern  states  of  the  American  Union. 
In  a  number  of  German  states  (Oldenburg,  Brunswick, 
Gotha,  Schaumburg-Lippe,  Waldeck  and  Liibeck)  the  cor- 
porations pay  no  income  tax,  but  the  shareholders  and 
bondholders  are  taxed.1  In  other  states,  like  Saxe-Wei- 
mar,  Lippe-Detmold,  Bremen  and  Hesse,  the  corpora- 
tions are  assessed,  but  the  shareholders  and  bondholders 
are  exempt.2  Even  in  these  commonwealths,  however,  the 
definitions  of  corporate  net  income  do  not  tally.  In  most 
of  the  remaining  states,  like  Prussia,  Saxony,  Baden,  Ba- 
varia, Wiirtemberg,  Mecklenburg,  Anhalt  and  the  other 
minor  commonwealths,  both  corporation  and  security  holder 
are  taxed  —  the  corporation  on  its  income  or  business,  the 
individual  on  his  income  from  the  corporate  security.8  In 
one  case  (Baden)  the  same  income  is  taxed  four  times  — 
that  is,  the  corporation  pays  a  business  tax  ( Grewerbesteuer) 

1  Cf.  the  details  in  Antoni,  "  Die  Steuersubjecte  im  Zusammenhalte  mit 
der  Durchfuhrung  der  Allgemeinheit  der  Besteuerung  nach  den  in  Deutsch- 
land  geltenden  Staatssteuergesetzen,"  in  Finanz-Archiv,  v.,  pp.  916-1033, 
especially  1010. 

2  gachsen-  Weimar,  Gesetz  iiber  die  allgemeine  Einkommensteuer,  von  19 
Miirz,  1869  [with  amendments  of  1874,  1877  and  1880],  §§  48  and  4.    Printed 
in    Finanz-Archiv,   ii.,  p.   932.  —  Lippe-Detmold,  Gesetz  die   Klassen- und 
klassifizierte  Einkommensteuer  betreffend,  von  1868  [with  amendments  of 
1882  and  1885],  §§  1,  7.  —  Bremen,  Einkommensteuergesetz  von  17  Dez., 
1874,  §  5.  — Hessen,  Gesetz  von  1884,  die  Einftihrung  der  Einkommensteuer 
betreffend,  arts.  4,  19.    In  Finanz-Archiv,  ii.,  pp.  383-434.    For  Hesse  in 
particular,  see  Schanz,  "  Die  direkten  Steuern  Hessens  und  deren  neueste 
Reform,"  Finanz-Archiv,  ii.,  pp.  235-529.    Also  Conrad's  Jahrbiicher,  xii., 
p.  40. 

8  Sachsen,  Einkommensteuergesetz  von  1878,  §  4.  —  Bayern,  Einkommen- 
steuergesetz von  1881,  art.  1,  §  15.  In  Seisser,  Die  Gesetze  iiber  die  direkten 
Steuern  im  Kgr.  Bayern,  i.,  168.  —  WUrtemberg,  Gesetz  von  1872,  art.  1,  §  3. 
In  Sammlung  wurttembergischer  Steuergesetze  (1883).  — Mecklenburg,  revi- 
diertes  Contributionsettict  von  1874,  §§  13,  45.  —  Baden,  Gesetz  von  1884, 
die  Einfiihrung  einer  allgemeinen  Einkommensteuer  betreffend,  art.  5.  In 
Finanz-Archiv,  ii,  pp.  361-394.  Cf.  Philippsberg,  Gesetz  iiber  die  direkten 
Steuern  in  Baden  (1888).  —  Anhalt,  Gesetze  von  1886,  die  EinfUhrung  einer 
Einkommensteuer  .  .  .  betreffend,  §§  2,  4.  Cf.  Schanz,  "  Die  Steuern  im 
Herzogthum  Anhalt,  ihre  Entwickelung  und  neueste  Reform,"  Finanz- 
Archiv,  iv.,  pp.  961-1070,  especially  1016.  For  Prussia,  see  Einkommen- 
steuergesetz von  1891,  §§  12  b,  14. 


254  ESS AyS  IN  TAXATION 

and  an  income  tax,  while  the  individual  shareholder  or  bond- 
holder pays  not  only  an  income  tax  but  also  a  tax  on  the 
interest  of  his  capital  invested  in  the  bonds  or  stock  (Kapit- 
alrentensteuer).1  In  the  original  draft  of  the  bill  to  reform 
the  Prussian  law,  this  same  quadruple  taxation  was  pro- 
posed ;  2  but  its  injustice  was  so  manifest  that  the  project 
failed.  It  was  also  proposed  in  Hesse,  but  without  success. 
Baden,  therefore,  is  the  only  state  in  the  world  which  can 
pride  itself  upon  assessing  the  same  object  four  times. 

We  see,  thus,  that  in  Europe  there  is  no  settled  practice  at 
all,  although  the  tendency  seems  to  be  to  tax  the  corpora- 
tion and  to  exempt  the  individual  on  his  income  from  cor- 
porate investments.  Is  this  the  correct  policy  ?  Is  it  true 
that  in  taxing  the  corporation,  whether  on  property  or  on 
income,  we  are  taxing  the  individual  holder  of  the  shares  or 
bonds  ? 

This  brings  us  to  the  pith  of  the  question.  What  is  the 
incidence  of  the  corporation  tax  ?  Where  does  the  burden 
really  fall  ?  This  question  has  never  yet  received  adequate 
attention.3 

VI.    Incidence  of  the  Tax. 

It  is  generally  assumed  that  a  tax  on  a  corporation  is 
a  tax  on  the  shareholder  or  bondholder.  But  as  has  already 
been  pointed  out,4  a  distinction  must  be  drawn  between  the 
original  holder  and  the  recent  purchaser  of  corporate  securi- 
ties. Under  certain  circumstances  the  tax  is  not  borne  by 
the  purchaser  of  new  corporate  securities,  but  falls  entirely 
on  the  original  holder  of  the  old  securities  issued  before  the 
tax  was  imposed.  If  a  corporation  is  taxed  on  its  income, 

1  Finanz-Archiv,  ii.,  p.  320.      Cf.  Lewald,  "Die  direkten  Steuern  in 
Baden,"  in  Finanz-Archiv,  iii.,  p.  350. 

2  Einkommensteuergesetzentwurf  von  1883. 

8  The  nearest  approach  to  a  discussion  of  this  question  is  to  be  found  in 
Helferich,  "Ueber  die  Einfiihrung  einer  Kapitalsteuer  in  Baden,"  in  Tti- 
binger  Zeitschrift  fur  die  gesarnmte  Staatswissenschaft,  1846,  pp.  291-324, 
especially  315  et  seq.  *  Supra,  p.  105. 


THE  TAXATION  OF  CORPORATIONS  255 

and  if  no  similar  tax  is  levied  on  other  corporations  or  on 
other  securities,  the  stock  will  fall  in  value  and  the  new  pur- 
chaser who  buys  at  the  reduced  price  really  buys  free  of 
tax.  The  amount  of  the  tax  is  thus  discounted  in  the  depre- 
ciation of  the  security.  With  the  lapse  of  time  and  the 
fluctuations  in  the  market  the  original  holders  all  disappear. 
Hence  at  any  given  time  an  exclusive  income  tax  levied  only 
on  the  corporation  and  not  on  the  shareholder  does  not  affect 
any  one  except  the  few  original  holders  who  bought  before 
the  imposition  of  the  tax.  It  is  only  a  question  of  a  few 
decades  until  this  class  of  original  holders  disappears 
entirely. 

As  to  bondholders,  the  argument  is  precisely  the  same  if 
the  corporation  is  empowered  to  deduct  the  tax  from  the 
interest.  The  lower  rate  of  interest  is  discounted  in  the 
depreciation  of  the  bond,  so  that  the  new  purchaser  loses 
nothing.  But  in  those  cases  where,  as  we  have  seen,  the  tax 
is  borne  by  the  corporation  and  not  deducted  from  the  inter- 
est,1 the  bondholder  does  not  suffer,  except  in  so  far  as 
it  somewhat  lessens  the  security  of  the  mortgage. 

Of  course  this  is  more  or  less  true  of  all  new  taxes  under 
certain  conditions.  By  virtue  of  what  is  called  the  capi- 
talization of  taxation  a  new  tax  affects  the  original  owner 
of  the  taxable  article  more  than  the  new  purchaser.  In 
the  case  of  direct  taxes  the  original  holder  is  injured  while 
the  future  purchaser  discounts  the  tax  in  the  depreciation 
of  the  article.  In  the  case  of  indirect  taxes  the  reverse  is 
true,  for  the  effect  of  the  tax  is  to  increase  the  price.  The 
lucky  owner  who  holds  the  commodity  before  the  imposition 
of  the  tax  reaps  the  benefit  of  the  rise  in  price.  The  point 
which  is  usually  overlooked,  however,  is  the  question  whether 

1  During  the  Civil  War,  when  a  federal  tax  was  imposed  on  the  coupons 
and  dividends  of  certain  corporations,  many  corporations  declared  these 
"  free  of  tax,"  and  refused  to  withhold  the  amount  from  the  sums  due  to  the 
bondholders  and  stockholders.  They  simply  assumed  the  tax  and  charged  it 
to  expense  account,  asserting  that  while  the  law  authorized,  it  did  not  direct, 
them  to  withhold  the  tax.  See  Internal  Revenue  Record,  vol.  i.  (1865),  p. 
153.  — The  practice  was  thus  the  same  as  in  Italy  to-day. 


256  ESSAYS  IN  TAXATION" 

the  new  tax  is  general  or  partial.  If  the  direct  tax  applies 
to  all  subjects  in  the  class  and  to  all  classes,  then  the  new 
purchaser  is  taxed  equally  with  the  original  owner.  For 
if  the  tax  is  general  there  will  be  no  depreciation  in  value. 
It  is  only  when  the  tax  is  partial,  assessing  some  articles  in 
the  class  more  than  others,  that  it  will  virtually  be  capi- 
talized, and  that  a  decrease  in  the  value  of  the  overtaxed 
article  will  ensue. 

If  we  apply  this  principle  to  the  corporation  tax,  we 
reach  the  following  results  :  If  the  corporation  tax  simply 
forms  a  part  of  a  general  scheme  of  income  taxation,  as 
in  England  or  in  Italy,  the  shareholder  must  indeed  be 
exempted.  Since  the  tax  affects  the  interest  on  all  invest- 
ments, not  simply  on  corporate  securities,  the  investor,  whose 
interest  was  cut  down,  will  not  find  any  non-taxable  securi- 
ties of  equal  desirability  from  which  he  can  obtain  the 
original  rate  of  interest.  In  such  a  case,  therefore,  the 
tax  on  the  corporation  is  a  tax  on  the  investor.  To  tax 
both  corporation  and  individuals  on  their  income  would 
really  be  double  taxation.  On  the  other  hand,  if  the  corpo- 
ration tax  is  partial  —  i.e.  if  only  corporate  and  not  other 
securities  are  taxed,  as  in  France,  or  if  only  a  few  classes 
of  corporations  are  taxed  —  then  the  taxation  of  the 
corporation  is  not  sufficient  to  reach  the  purchaser.  He 
will  practically  escape,  because  the  freedom  of  investing 
in  non-taxable  securities  will  enable  him  to  discount  the 
tax  in  the  price  he  pays.  To  tax  both  corporation  and 
shareholder  in  such  a  case  is  not  unjust  or  double  taxa- 
tion. To  tax  the  corporation  alone  would  in  reality  exempt 
the  shareholder  who  purchased  after  the  tax  was  imposed. 
An  additional  tax  on  the  shareholder  would,  thus,  not  be 
double  taxation. 

Thus  far  we  have  been  discussing  the  incidence  of  the 
corporation  tax  in  a  scheme  of  income  taxation.  How  does 
the  matter  stand  in  the  case  of  a  property  tax  ? 

The  principle  is  the  same.  Let  us  assume  that  in  addi- 
tion to  the  corporation  tax  a  general  property  tax  is  actually 


THE  TAXATION  OF  CORPORATIONS  257 

levied  on  all  individuals.  The  corporation  would  then  pay 
the  first  tax,  and  the  individuals  would  pay  the  second  tax 
upon  corporate  shares  and  bonds.  This  would  indeed  be 
duplicate  taxation,  but  only  on  the  assumption  that  the 
corporation  tax  is  imposed  on  all  corporations  in  general, 
and  that  the  property  tax  is  actually  assessed  on  all  kinds 
of  property.  In  such  a  case  it  would  be  unjust  to  tax  both 
corporation  and  shareholders.  This  is  the  assumption  made 
by  most  of  the  American  commonwealths,  which,  as  we 
have  seen,  generally  exempt  the  shares  when  the  corporate 
property  or  franchise  is  taxed. 

The  assumption,  however,  is  not  absolutely  correct.  In 
the  first  place,  only  special  classes  of  corporations  are  usually 
taxed.  Secondly,  the  general  property  tax  we  know  to  be 
general  only  in  name,  for  by  far  the  larger  part  of  personal 
property  or  of  investments  in  the  hands  of  individuals  es- 
capes taxation.  Under  these  conditions  the  matter  is  entirely 
different.  The  corporation  tax  will  now  be  discounted 
in  the  lower  market  value  of  the  shares,  because,  other 
things  being  equal,  the  value  of  new  investments  will  vary 
in  proportion  to  the  net  profits  to  be  derived  therefrom. 
Although  the  corporate  tax  reduces  the  dividends,  the 
reduced  dividends  on  the  reduced  value  will  yield  to  new 
investors  as  large  a  percentage  as  did  the  larger  divi- 
dends on  a  property  of  greater  value  —  greater  because 
untaxed.  Thus  where  there  is  only  a  partial  tax  on 
personal  property  the  corporation  tax  puts  the  new  pur- 
chaser of  shares  in  the  same  position  as  if  he  owned 
non-taxable  property,  i.e.  it  practically  exempts  all  the 
shareholders  except  the  original  owners.  In  the  case  of 
bondholders  where  the  corporation  tax  is  deducted  from 
the  interest,  this  is  equally  true.  When  the  corporation 
tax  is  assumed  by  the  corporation  and  not  deducted  from 
the  interest,  —  the  almost  universal  rule  in  the  United 
States — the  bondholders  are  not  reached  at  all,  except  in 
the  very  indirect  way  that  they  may  be  exposed  to  an 
ultimate  diminution  in  the  security  of  their  lien.  The  tax 


258  ESSAYS  IN  TAXATION 

as  such  does  not  strike  them  ;  their  property,  consisting  of 
corporate  bonds,  goes  scot-free.  A  property  tax  or  franchise 
tax  on  the  corporation,  under  the  given  conditions,  is  not  a 
tax  on  the  individual  holder  of  corporate  securities. 

The  practical  conclusion  applicable  to  the  United  States 
to-day  is  as  follows  : 

If  the  corporation  tax  is  to  be  utilized  as  a  means  of  reach- 
ing the  faculty  of  the  security  holder,  rather  than  of  the 
fictitious  person  known  as  the  corporation,  it  is  necessary  to 
generalize  the  tax  —  to  levy  a  general  tax  on  corporations,  as 
a  few  states  are  now  beginning  to  do.  Furthermore,  the 
corporation  tax  must  be  regarded  simply  as  a  part  of  a  larger 
system  of  taxation,  the  constituent  elements  of  which  must 
endeavor  to  reach  the  other  sources  of  the  taxpayer's  ability. 
The  corporation  tax,  in  other  words,  must  be  supplemented 
by  other  taxes,  both  state  and  local,  in  order  that  these  taxes 
combined  may  stand  in  some  proportion  to  the  revenue  of 
the  individual.  Then,  but  only  then,  will  it  always  be 
double  taxation  to  assess  the  corporation  as  well  as  the 
security  holder.  So  far  as  there  is  a  decided  tendency  to 
generalize  the  corporation  tax,  the  trend  of  American  legis- 
lation, in  seeking  to  avoid  double  taxation,  is  in  the  right 
direction. 

VII.    Local  Taxation. 

Up  to  this  point  we  have  discussed  chiefly  the  state  taxa- 
tion of  corporations.  But  the  lesser  governmental  divisions 
also  have  their  claims  to  urge,  especially  in  modern  times 
when  local  needs  outweigh  so  heavily  those  of  the  states. 
There  are  no  less  than  five  different  methods  of  taxing  cor- 
porations for  local  purposes  in  the  United  States.  These  are 
as  follows  : 

1.  A  local  general  property  tax. 

2.  A  local   corporate   franchise  tax   in   addition   to   the 
general  property  tax. 

3.  A  local  tax  on  real  estate. 


THE  TAXATION-  OF  CORPORATIONS  259 

4.  No  local  tax  at  all. 

5.  A  distribution  of  the  state  tax  on  corporations  to  local 
districts. 

The  first  plan,  that  of  the  local  property  tax,  is  still  usual, 
even  in  some  of  the  commonwealths  that  have  abandoned 
the  general  property  tax  on  corporations  for  state  purposes. 
Corporate  property  is  in  some  cases  measured  by  the  capi- 
tal stock.  In  New  York,  for  example,  while  banks,  in- 
surance and  telegraph  companies  are  taxed  according  to 
special  laws,  on  all  other  domestic  corporations  the  tax 
is  levied  at  the  usual  rate  of  the  local  property  tax  on 
the  actual  value  of  the  capital  stock,  together  with  the 
surplus  profits  or  reserve  funds  exceeding  ten  per  cent  of 
the  capital,  after  deducting  the  assessed  value  of  the  real 
estate  and  of  the  shares  of  stock  in  other  taxable  corpora- 
tions.1 Foreign  corporations,  however,  are  taxable  only  on 
the  sums  actually  invested  in  the  state. 

The  second  method,  that  of  a  corporate  franchise  tax  in 
addition  to  the  local  property  tax,  is  found  in  Kentucky, 
where  the  tax  on  the  franchises  of  certain  corporations  may 
be  levied  also  by  the  local  divisions.  Somewhat  analogous 
to  this  are  the  local  licenses  which  in  many  of  the  Southern 
states  are  imposed  on  corporations  as  well  as  on  individuals 
in  addition  to  the  state  licenses. 

The  third  method,  that  of  a  local  tax  on  real  estate  only, 
is  becoming  more  and  more  common,  especially  in  the  com- 
monwealths which  impose  a  separate  state  tax  on  certain 
kinds  of  corporations,  like  transportation  and  insurance  com- 
panies. It  is  likewise  the  custom  with  banks,  which  pay  a 
local  real  estate  tax,  and  which  also  advance  the  tax  on 
shares  assessed  to  the  shareholders. 

The  fourth  plan,  the  exemption  from  local  taxation,  is 
found  in  a  few  states  which  impose  a  franchise  tax  on 
certain  classes  of  corporations.  The  only  state  which  has 

1  Laws  of  1857,  chap.  456,  vol.  ii.,  p.  i.  For  a  statement  of  the  actual 
decisions  under  this  law,  see  J.  T.  Davies,  A  Compilation  of .  .  .  Cases 
relating  to  the  System  of  Taxation  in  New  York. 


260  ESSAYS  IN  TAXATION 

a  general  corporation  tax  law  in  lieu  of  local  taxation  is 
Pennsylvania.  Even  there  certain  classes,  like  purely  manu- 
facturing companies,  which  are  excepted  from  the  opera- 
tion of  the  general  corporation  tax,  are  subject  to  local 
taxation  on  their  real  estate.  Furthermore,  the  real 
estate  of  railroad  and  other  transportation  and  trans- 
mission companies,  not  necessary  to  the  exercise  of  their 
franchise,  may  be  taxed  by  the  local  bodies.  Some  cities 
are  also  permitted  by  their  charters  to  tax  the  real  estate 
of  certain  corporations,  and  the  courts  have  ruled  that 
the  general  corporation-tax  law  does  not  deprive  these 
municipalities  of  the  right  to  tax  their  real  estate.1 
Finally,  the  tax  on  banks  and  insurance  companies,  being 
in  some  cases  practically  a  tax  on  incomes,  does  not  exempt 
their  real  estate  entirely  from  taxation.  Even  in  Pennsyl- 
vania, therefore,  there  is  a  slight  local  taxation  of  corporate 
real  estate. 

The  fifth  and  last  method  of  local  taxation,  the  distribu- 
tion of  the  state  corporation  tax  to  local  bodies,  is  found  in 
the  case  of  railroads  in  several  states  like  California,  Maine, 
Mississippi,  West  Virginia  and  in  the  case  of  corporations 
in  general  in  Massachusetts.  But  in  some  of  these  states 
the  local  bodies  levy  additional  taxes,  as  in  Massachusetts 
on  real  estate  and  machinery. 

Of  all  these  systems  the  third  is  clearly  the  best.  All 
corporations  with  the  possible  exception  of  those  enjoying 
special  municipal  franchises  should  be  made  to  pay  a 
local  tax  on  their  real  estate;  first,  because  it  is  mainly  the 
realty  which  comes  into  direct  relations  with  the  purely 
local  functions ;  and  secondly,  because  the  attempt  to  tax 
personalty  would  immediately  lead  again  to  the  uncer- 
tainty and  confusion  from  which  it  has  been  the  policy  of 
all  recent  reforms  to  extricate  us. 

The  New  York  system,  therefore,  is  doubly  unwise:  first, 
because  it  imposes  a  state  tax  on  corporate  real  estate  ; 
and  secondly,  because  it  further  imposes  a  local  tax  on 
1  Pennsylvania  R.  R.  Co.  vs.  Pittsburgh,  104  Pa.  State  522  (1883) , 


THE  TAXATION  OF  CORPORATIONS  261 

the  total  corporate  property.  The  Minnesota  or  the  Connect- 
icut system,  as  applied  to  railroads,  is  unwise  because  it 
imposes  no  local  tax  at  all.  The  system  as  formerly  prac- 
tised in  "Washington  was  unwise  because  it  imposed  only  a 
single  state  tax  which  was  in  part  redistributed  to  the  local 
divisions.  All  these  methods  err  because  they  fail  to  analyze 
the  deeper  principles  that  underlie  corporate  taxation. 

The  plan  of  levying  a  general  state  tax  and  distributing  a 
part  of  the  proceeds  to  the  counties  or  municipalities  contains 
a  fruitful  idea.  It  is  already  in  vogue  in  an  incomplete 
way  in  a  few  commonwealths,  as  we  have  seen.  But  it  is 
susceptible  of  great  expansion  and  may  be  of  considerable 
value  in  solving  the  vexed  question  of  local  taxation.  As 
applied  to  corporations,  however,  such  a  plan  of  redistribu- 
tion is  entirely  premature.  Until  the  proceeds  of  the 
state  corporation  tax  are  sufficient  to  enable  the  com- 
monwealth to  dispense  entirely  with  the  state  tax  on 
real  property,  nothing  of  the  kind  should  be  contemplated. 
Whatever  claims  the  local  divisions  may  justly  have  on 
the  overfilled  treasury  of  the  commonwealth  must  be  set 
aside  until  the  taxation  of  real  estate  is  left  exclusively  to 
them.  The  abolition  of  the  state  tax  on  real  estate  is  per- 
haps the  most  necessary  reform  in  the  American  system  ; 
to  this  all  other  changes  must  be  subordinated.  If  the 
commonwealth  treasury  should  be  supplied  through  other 
sources,  such  as  a  state  inheritance  tax  or  a  state  income  tax 
or  a  state  tax  on  other  elements,  it  would  be  possible  not 
only  to  abandon  the  state  taxation  of  real  estate,  but  also  to 
relinquish  to  the  local  bodies  a  portion  of  the  state  corpora- 
tion taxes.  But  until  that  time  arrives,  a  distribution  of  the 
corporation  taxes  among  the  local  divisions  will  be  inadvis- 
able. The  logical  plan  for  the  immediate  future  is  to  tax 
corporations  on  their  net  receipts,  or  on  a  valuation  equal  to 
the  stock  and  bonds,  for  state  purposes  ;  and  to  tax  them  on 
their  real  property  for  local  purposes.  This,  and  this  alone, 
satisfies  the  demands  of  scientific  method  and  of  practical 
policy. 


262  ESSAYS  IN  TAXATION" 

VIII.    Conclusion. 

From  the  preceding  survey  it  appears  that  the  United 
States  are  slowly  advancing  to  a  more  rational  and  harmoni- 
ous system.  The  tendency  of  legislation  and  of  judicial 
interpretation  in  the  most  progressive  states  is  toward  the 
following  plan,  which,  although  not  yet  completely  realized 
in  all  its  features  in  any  one  state,  is  in  accord  with  sound 
economic  principles  : 

1.  Corporations  should  be  taxed  separately  and  on  dif- 
ferent principles  from  individuals. 

2.  Corporations  should  be  taxed  locally  on  their  real 
estate  only. 

3.  Corporations  should  be  taxed  for  state  purposes  on 
their  earnings,  or  on  their  capital  and  loans. 

4.  Only   so   much   of   total   earnings   or   capital    should 
be   taxed   as   is   actually  received  or  employed  within  the 
state.     In  the  case  of  transportation  companies,  a  convenient 
and  fairly  accurate  test  is  mileage. 

5.  Where  capital  and  loans  are  taxed,  the  residence  of 
the  shareholder  or  bondholder  should  be  immaterial. 

6.  There  should  be  no  distinction  between  domestic  and 
foreign  corporations.     Each  should  be  taxed  for  its  business 
done  or  capital  employed  within  the  state. 

7.  If  corporations  are  taxed  on  their  property,  property 
beyond  the  state  should  be  exempt. 

8.  If  corporations  are  taxed  on  their  capital  stock,  they 
should  not  be  taxed  again  on  their  property. 

9.  Where  the  corporate  stock  or  property  is  taxed,  the 
shareholder    should    be   exempt.      If    corporate   loans   are 
taxed,  the  bondholder  should  be  exempt. 

10.  Where  the  corporation  and  the  shareholder  or  bond- 
holder are  residents  of   different  states,  the  tax  should  be 
divided  between  the  states  by  interstate  agreements. 

11.  An  additional  tax  should  be  levied  on  corporations 
which  have  through  natural,  legal  or  economic  forces  become 
monopolistic  enterprises. 


THE  TAXATION  OF  CORPORATIONS  263 

AMERICAN  BIBLIOGRAPHY   OF   THE   CORPORATION  TAX. 

[In  addition  to  the  tax-commission  reports  cited  at  the  end  of  chapter  xiii.] 

1.  ABBOTT,  W.  G.    Objections  to  the  Taxation  of  Savings  Banks.   New 

York,  1880. 

2.  ADAMS,  C.  F.,  Jr.,  WILLIAMS,  W.  B.,  and  OBERLY,  J.  H.     (A  com- 

mittee appointed  at  a  convention  of  state  railroad  commissioners 
to  examine  into  and  report  the  methods  of  taxation  as  respects 
railroads  and  railroad  securities  now  in  use  in  the  various  states 
of  the  Union,  as  well  as  in  foreign  countries;  and  further,  to 
report  a  plan  for  an  equitable  and  uniform  system  of  such  taxa- 
tion.) Taxation  of  Railroads  and  Railroad  Securities.  New  York, 
1880. 

3.  AMES,  JOHN  H.     The  Taxation  of  Real  Property  and  Corporations. 

Des  Moines,  1878. 

4.  ATKINSON,  EDWARD.     Argument  for  a  Change  in  the  Law  in  regard 

to  Taxing  Foreign  Corporations.    Boston,  1887. 

5.  COLEMAN,  JAMES  H.    Letters  on  Corporations  and  Taxation.    New 

York,  1878. 

6.  FOSTER,  ROGER.    The  Taxation  of  the  Elevated  Railroads  in  the 

City  of  New  York.    New  York,  1883. 

7.  HILLHOUSE,  THOMAS  J.    Taxation  of  Banks  by  the  State  of  New 

York.     New  York,  1880. 

8.  HOPKINS,  S.  M.    Speech  on  the  Subject  of  Taxing  Bank  Stock. 

Albany,  1822. 

9.  MOORE,  EDWARD   C.,  Jr.     Corporate  Taxation.    In  18  American 

Law  Review,  1884. 

10.  OLMSTEAD,  M.  G.     Argument  on  Behalf  of  Certain  Corporate  Inter- 

ests before  the  Ways  and  Means  Committee  [of  Pennsylvania]. 
Harrisburg,  1895. 

11.  PATTERSON,  C.  STUART.      Speech  on  the  Taxation  of  Railroads 

before  the  Committee  of  Ways  and  Means  [of  Pennsylvania]. 
Harrisburg,  1895. 

12.  SHORT,  EDWARD  L.     Careless  Legislation  on  Corporate  Taxation, 

29  Albany  Law  Journal. 

13.  SPEAR,  T.  J.     Bank  Taxation.     21  Albany  Law  Journal. 

14.  STEVENS,  B.  F.     The  Taxation  of  Life  Insurance  Companies.     Bos- 

ton, 1875. 

15.  STEVENS,  W.  B.     The  Taxation  of  State  Banks.     Boston,  1865. 

16.  WILLIAMS,  CHAUNCY  P.     The  National  Banks  and  State  Taxation. 

New  York,  1887. 

17.  WRIGHT,  JOHN  A.     Memorandum  of  a  System  of  Taxation,  sub- 

mitted to  the  Committee  for  Revision  of  the  Revenue  Laws  of 
Pennsylvania.  Harrisburg,  1890. 


264  ESSAYS  IN  TAXATION 

18.  The  State  and  National  Banks.     The  Question  of  Taxation.     Al- 

bany, 1864. 

19.  Keport  of  the  Committee  of  Bank  Officers  of  the  City  of  New  York 

in  relation  to  Bank  Taxation.     New  York,  1875. 

20.  [Seven]  Reports  of  the  American  Bankers'  Association  upon  Bank 

Taxation.    New  York,  1875-1889. 


CHAPTER  IX. 

THE  CLASSIFICATION  OF  PUBLIC   REVENUES. 

AMONG  the  unsettled  questions  of  the  science  of  finance 
few  are  more  troublesome  than  that  of  classifying  the  differ- 
ent kinds  of  public  income.  Classification  is  indeed  not  of 
supreme  importance,  for  matter  is  always  more  essential  than 
form.  But  correct  classification  is  helpful  in  many  ways. 
It  requires  logical  criticism  and  rigorous  analysis,  and  thus 
becomes  a  test  of  mental  vigor  ;  it  conduces  to  accurate 
definition  and  prevents  looseness  of  expression  and  con- 
fusion of  thought ;  it  may  have  important  practical  results 
in  deciding  questions  of  fact  and  in  assigning  definite  values 
to  doubtful  categories  ;  it  points  out  contrasts  and  resem- 
blances, and  by  eliminating  or  combining  what  is  common, 
often  suggests  a  clearer  conception  of  the  subject-matter. 
Correct  classification  is,  in  truth,  an  essential  condition  of 
all  scientific  progress. 

It  has  frequently  been  remarked  that  we  must  distinguish 
between  historical  and  actual  classifications.  For  example, 
the  whole  class  of  lucrative  prerogatives  —  the  Regalia  of  the 
Teutonic  kingdoms  and  of  early  fiscal  science  —  were  for- 
merly separated  from  the  other  categories  of  public  reve- 
nues because  of  their  commanding  importance  in  mediaeval 
countries  and  of  their  supposed  points  of  difference ;  whereas 
well-nigh  every  recent  writer  of  importance,  even  in  Germany, 
has  confessed  that  all  such  revenues  are  capable  of  being  classi- 
fied under  one  of  the  other  modern  categories.  So,  again, 
while  the  revenue  from  the  incidents  of  feudal  tenure  played 
a  great  role  in  the  classification  of  Blackstone  and  other  early 
writers,  the  need  of  showing  the  composite  nature  of  such 

265 


266  ESSAYS  IN  TAXATION 

revenues  has  been  obviated  by  the  disappearance  of  the  ten- 
ures themselves.  Finally,  special  assessments  are  a  growth  of 
comparatively  recent  times.  Only  a  short  time  ago,  a  classi- 
fication of  public  revenues  might  safely  have  ignored  their 
existence ;  now  a  logical  classification  of  actual  revenues 
would  be  incomplete  without  them.  What  concerns  us 
here  is  a  classification  applicable  to  modern  conditions. 

I.    The  Primary  Classification. 

From  the  standpoint  of  the  individual  all  contributions  to 
government  are  either  gratuitous,  contractual  or  compulsory. 
Every  governmental  revenue  must  fall  within  one  of  these 
three  great  classes.  Individuals  may  make  the  government 
a  free  gift,  they  may  agree  or  contract  to  pay,  or  they  may  be 
compelled  to  pay.  The  first  method  of  securing  revenue 
was  at  one  time  important,  but  its  influence  to-day  is  slight. 
The  second  and  third  methods  correspond  to  the  widely 
adopted  classification  suggested  by  Adam  Smith,1  who  tells 
us  that : 

The  revenue  which  must  defray  .  .  .  the  necessary  expenses  of 
government  may  be  drawn  either,  first,  from  some  fund  which 
peculiarly  belongs  to  the  sovereign  or  commonwealth,  and  which 
is  independent  of  the  revenue  of  the  people,  or,  secondly,  from 
the  revenue  of  the  people. 

That  is,  the  government  may  hi  the  first  place  act  like  a 
private  individual,  possessing  lands  or  other  revenue-yielding 
property,  and  engaging  in  mercantile,  financial  or  industrial 
pursuits.  As  Petty,  the  author  of  the  first  systematic  English 
treatise  on  taxation,  put  it  in  the  seventeenth  century,  the 
state  is  in  some  places  the  common  cashier,  the  common  usurer, 
the  common  insurer  or  the  common  beggar.2  This  is  what  the 
French  call  in  the  widest  sense  the  revenue  from  the  private 
and  industrial  domain  of  the  state,  and  what  the  Germans 

1  Wealth  of  Nations,  book  v.,  chap.  ii. 

2  William  Petty,  A  Treatise  of  Taxes  and  Contributions,  London,  1667, 
pp.  60,  61. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES       267 

term  the  private-economic  income.  A  better  term,  perhaps,  is 
contractual  income  ;  since  the  government  here  puts  itself  in 
the  position  of  a  private  person  making  a  contract  with 
another  person.  Such  payments  all  rest  on  an  agreement 
between  the  two  contracting  parties,  in  sharp  contrast  to  the 
payments  which  the  government  demands  by  virtue  of  the 
sovereign  powers  delegated  to  it. 

We  often  hear  of  the  distinction  between  voluntary 
and  compulsory  contributions,  meaning  by  the  former  the 
free  gifts  of  the  citizens.  This  distinction,  however,  is  not 
perfectly  accurate;  for  contractual  contributions  are  also  vol- 
untary, without  being  gifts.  In  the  case  of  a  contract,  the 
government  agrees  to  do  some  particular  thing  in  return  for 
a  payment,  leasing  land,  for  instance,  in  return  for  rent;  in 
the  case  of  the  free  gift,  the  government  does  not  under- 
take nor  does  the  donor  expect  any  specific  action  in  return. 
Yet  both  payments  are  voluntary.  We  must  therefore 
distinguish  not  merely  between  voluntary  and  compulsory 
contributions,  but  between  gratuitous,  contractual  and  com- 
pulsory contributions. 

Thus  far  almost  all  writers  are  agreed.  The  difficulty 
arises  when  we  desire  to  classify  the  various  kinds  of  com- 
pulsory revenues  and  to  distinguish  between  some  of  these 
subdivisions  and  the  different  kinds  of  contractual  rev- 
enues. All  possible  combinations  have  been  made,  especially 
by  recent  German  writers.  Let  us  confine  ourselves  in  this 
chapter  to  the  pith  of  the  controversy,  namely,  to  the  sub- 
division of  the  compulsory  contributions  and  their  rela- 
tion to  some  of  the  contractual  revenues,  as,  for  instance, 
the  charges  made  for  the  services  of  governmental  enter- 
prises, like  the  post-office,  the  telegraph  and  the  like. 

In  taking  the-  property  of  individuals  the  sovereignty  of 
the  modern  state  manifests  itself  in  different  ways.  The 
government  may  exercise  in  turn  the  power  of  eminent 
domain,  the  penal  power,  the  police  power  or  the  taxing 
power. 

The   power  of   eminent  domain  confers  on   the  govern- 


268  ESSAYS  IN  TAXATION 

merit  the  right  of  taking  at  its  discretion,  and  to  an  indefinite 
extent,  private  property  for  particular  uses.  With  the  con- 
stitutional and  moral  limitations  upon  this  power  we  have 
not  here  to  deal,  chiefly  because  the  power  is  for  the 
most  part  not  a  source  of  net  revenue.  The  fact  that  in 
all  free  governments  private  property  cannot  be  taken 
under  this  power  except  for  public  use,  and  even  then  not 
without  just  compensation,  would  in  itself  show  that  no 
net  income  to  the  state  is  contemplated.  Yet  such  revenue 
may  accrue  incidentally ;  for  the  benefits  accruing  to  the 
government  through  the  expropriation  may  conceivably  be 
greater  than  the  damage  inflicted  on  the  private  individual. 
Revenue  through  expropriation  is  thus  the  first  class  of 
compulsory  income. 

The  second  sovereign  power  of  fiscal  importance  is  the 
penal  power,  or  right  of  inflicting  fines  and  penalties, 
known  technically  as  the  power  of  sanction.  This  might 
be  declared  a  part  of  the  police,  or  regulative,  power  of  the 
state,  since  every  government  regulation  must  carry  with 
it  the  power  of  enforcement.  But  on  account  of  the  de- 
cidedly problematic  fiscal  importance  of  the  police  power, 
it  seems  better  to  separate  them.  The  power  to  adjudge 
fines  and  penalties,  however,  while  often  quite  impor- 
tant as  a  source  of  revenue,  belongs  rather  to  penology 
and  administration  than  to  the  science  of  finance ;  for 
the  private  property  is  here  taken,  not  in  accordance  with 
the  needs  of  the  state  or  with  any  principles  of  equality  or 
uniformity  or  benefits  or  compensation,  but  solely  as  a  pun- 
ishment inflicted  on  the  individual.  The  only  limit  to  its 
fiscal  significance  in  free  countries  is  the  vague  provision, 
as  in  the  constitution  of  the  United  States,  that  excessive 
fines  shall  not  be  imposed  or  cruel  and  unusual  punish- 
ments inflicted.  Fines  and  penalties  thus  form  by  them- 
selves a  class  of  compulsory  revenues  levied  according  to 
definite  but  non-fiscal  principles.  It  is  obviously  wrong  to 
class  them  with  fees,  as  do  some  writers,  or  to  ignore  them 
entirely,  as  do  others. 


THE  CLASSIFICATION-  OF  PUBLIC  REVENUES      269 

The  third  sovereign  power  of  the  state  is  the  police 
power,  or  the  power  of  regulation.  This  has  played  a  great 
role  in  American  jurisprudence.  Yet  it  may  be  confidently 
stated  that  from  the  standpoint  of  the  science  of  finance  the 
distinction  drawn  between  the  police  power  and  the  taxing 
power  is  to  a  great  extent  a  fiction,  referable  to  certain 
difficulties  in  American  constitutional  law  and  to  a  lack  of 
economic  analysis  OR  the  part  of  the  judges.  Let  us  study 
this  point  more  in  detail. 

II.    The  Police  Power  versus  the  Taxing  Power. 

The  commonly  accepted  distinction  between  these  powers 
is  that  the  former  is  for  regulation  and  the  latter  for  revenue. 
One  argument  in  support  of  this  view  is  that  advanced  by 
authors  like  Mr.  David  A.  Wells,  who  contend  that  a  so-called 
tax  which  looks  to  anything  besides  the  securing  of  revenue  is 
not  a  tax,  but  an  unconstitutional  exercise  of  the  taxing  power. 
But  even  adherents  to  the  distinction  between  the  police  power 
and  the  taxing  power,  like  Judge  Cooley,  confess  "that,  in 
the  apportionment  of  taxes,  other  considerations  than  those 
which  regard  the  production  of  a  revenue  are  admissible, 
and  that  the  right  of  any  sovereignty  to  look  beyond  the  im- 
mediate purpose  to  the  general  effect  cannot  be  disputed." l 
The  position  of  Mr.  Wells  is  the  exact  opposite  of  that  of 
Professor  Wagner,  who  includes  in  the  very  definition  of  a 
tax  the  "  socio-political  "  element  or  the  duty  of  regulating 
and  correcting  the  distribution  and  use  of  private  property.2 
The  one  writer  would  refuse  the  name  "  tax  "  to  an  imposi- 
tion looking  to  anything  else  than  mere  revenue  :  the  other 
ought  logically  to  withhold  the  name  from  an  imposition  not 
looking  to  anything  else  than  mere  revenue.  These  positions 
are  mutually  exclusive  and  equally  extreme. 

On  the  other  hand,  the  distinction  of  Judge  Cooley  is 
almost  quite  as  untenable.  Cases  where  the  primary  pur- 

1  Cooley,  Taxation,  2d  edition,  p.  687. 

2  Wagner,  Finanzwissenschaft,  ii.  (2d  edition,  1890) ,  p.  210. 


270  ESSAYS  77V  TAXATION 

pose  is  regulation,  he  thinks,  are  referable  to  the  police 
power  ;  cases  where  the  primary  purpose  is  revenue  are  ref- 
erable to  the  taxing  power.  Mr.  Cooley  himself  confesses 
that  import  duties  with  incidental  protection  are  taxes.  But 
suppose,  as  has  often  occurred,  that  they  are  protective 
duties  with  incidental  revenue.  Are  they  any  the  less  taxes 
on  that  account  ?  How  about  the  tax  on  bachelors,  which 
was  imposed  for  the  express  purpose  of  diminishing  celibacy  ? 
How  about  the  ten  per  cent  tax  on  state  bank  notes,  im- 
posed avowedly  to  destroy  the  state  bank  issues  ?  How 
about  the  American  tax  on  oleomargarine,  confessedly  of  a 
regulative  nature  ?  How  about  taxes  on  spirituous  liquors 
in  the  shape  of  liquor  licenses,  to  regulate  and  diminish  the 
liquor  traffic  ?  How  about  the  many  indirect  taxes  enacted 
in  consequence  of  sumptuary  laws  ?  How  about  certain 
inheritance  taxes,  whose  imposition  is  demanded  on  the  ex- 
press ground  that  they  will  limit  fortunes  ?  How  about  the 
single  tax,  whose  only  raison  cCGtre  is  the  attempt  to  change 
the  existing  distribution  of  wealth  ?  Shall  we  call  the  Indian 
duty  on  opium  a  tax,  and  refuse  the  name  to  the  American 
internal  revenue  charge,  because  India  looks  primarily  to 
revenue,  and  the  United  States  to  regulation?  Shall  we 
call  the  French  impdt  des  patentee  a  tax,  and  deny  the  name 
to  the  analogous  license  or  privilege  taxes  in  some  of  the 
Southern  commonwealths,  because  in  the  latter  case  the 
object  is  sometimes  distinctively  regulative  ?  In  fact,  if  this 
is  to  be  our  line  of  cleavage,  we  must  reconstruct  the  science 
of  finance  and  remove  from  the  class  of  taxes  whole  catego- 
ries of  impositions  to  which  no  one  has  ever  thought  of 
denying  the  character  or  name  of  tax. 

The  confusion  in  the  American  law  is  at  once  compli- 
mentary and  uncomplimentary  to  the  judiciary.  It  is  com- 
plimentary in  the  sense  that  the  judges,  when  brought  face 
to  face  with  the  conflict  between  constitutional  limitations 
and  the  demands  of  social  evolution  (or  what  is  known  in 
legal  parlance  as  public  policy),  have  sought  to  remain  true 
to  their  function  as  the  final  interpreters  of  social  progress. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      271 

This  they  have  been  able  to  do,  however,  only  through  legal 
fictions  and  divergent  decisions.  Any  one  who  has  studied 
the  American  law  of  taxation  as  a  whole  must  have  become 
painfully  conscious  of  the  hopeless  contradictions  among  the 
laws  of  the  several  states  on  many  important  points.  This 
condition  is  due  in  great  measure  to  the  fact  that  the  consti- 
tution or  laws  of  one  state  by  implication  forbid  what  the  con- 
stitution or  laws  of  another  state  expressly  permit.  In  order 
to  take  an  actual  case,  which  is  perhaps  in  line  with  public 
policy,  out  of  the  range  of  the  legal  inhibition,  the  courts  of 
the  first  state  are  forced  to  adopt  an  interpretation  wholly 
unnecessary  in  the  second.  Thus  the  continuity  of  social 
development  is  preserved,  even  at  the  sacrifice  of  legal  con- 
sistency or  uniformity.  For  instance,  in  New  York  street- 
car licenses  are  held  to  fall  under  the  taxing  power,  while 
in  Pennsylvania  they  are  put  under  the  police  power,  sim- 
ply because,  under  the  particular  conditions,  it  seemed  to 
be  a  matter  of  equity,  in  the  one  case  to  uphold,  and  in  the 
other  to  object  to  such  a  charge.1  The  payment  in  the  two 
instances  was  the  same,  both  in  amount  and  in  principle ; 
but  the  attempt  to  make  the  same  laws  conform  to  a  public 
policy  which  differs  in  the  different  states  has  brought  about 
a  contradiction.  So,  too,  the  whole  system  of  high  license 
or  liquor  taxes  is  in  some  states  brought  under  the  taxing 
power  ;  but  in  others,  because  of  certain  constitutional  diffi- 
culties, it  is  put  under  the  police  power.2  To  this  extent 
the  police  power  has  been  a  legal  fiction  to  enable  the  courts 
to  uphold  what  could  not  well  be  brought  under  the  taxing 
power  ;  although  in  another  leading  case  3  the  liquor  tax  was 
upheld  under  the  taxing  power  because  there  was  a  constitu- 
tional obstacle  to  its  being  put  under  the  licensing  or  police 
power.  The  police  power  is  of  great  and  growing  legal  im- 
portance in  the  United  States,  largely  because  of  the  peculiar 

1  Cf.  2d  Avenue  Railroad  Cases,  32  N.  Y.  261,  with  Railroad  Company  vs. 
Philadelphia,  68  Pa.  119.    What  was  held  "reasonable"  in  one  case  was 
declared  "unreasonable  "  in  the  other. 

2  Burch  vs.  Savannah,  42  Ga.  596.     Cf.  60  Texas,  86. 
«  Youngblood  vs.  Sexton,  32  Mich.  406. 


272  ESSAYS  IN  TAXATION 

principles  of  American  governmental  relations,  whereby 
local  bodies  are  deemed  to  have  only  those  powers  expressly 
delegated  to  them,  in  contradistinction  to  the  European 
method  according  to  which  local  bodies  possess,  in  certain 
respects,  all  powers  not  expressly  withheld  from  them.1 
Many  of  our  cities  and  towns  have  no  taxing  power ;  and 
even  when  they  have  the  power,  it  is  strictly  construed. 
The  courts,  therefore,  have  been  compelled  to  uphold  much 
under  the  police  power  that  under  other  and  more  favorable 
conditions  they  would  and  could  have  upheld  under  the  tax- 
ing power. 

On  the  other  hand,  there  is  an  element  which  is  not  quite 
so  complimentary  to  the  judges.  The  courts  have  fre- 
quently confused  taxes  in  the  narrower  sense  with  the 
exercise  of  the  taxing  power  in  the  wider  sense.  As  we 
shall  see,  there  are  various  forms  in  which  the  taxing  power 
may  manifest  itself :  taxes  in  the  narrower  sense  are  only 
one  form.  Special  assessments  for  instance,  have  been  almost 
universally  upheld  as  an  exercise  of  the  taxing  power,  while 
sharply  distinguished  from  taxes  in  the  narrower  sense.  Yet 
in  a  leading  case  sidewalk  assessments,  which  as  a  matter  of 
principle  do  not  differ  at  all  from  other  special  assess- 
ments upheld  under  the  taxing  power,  have  been  declared 
police  regulations.2  The  court  has  here  simply  confused 
taxes  with  the  taxing  power.  It  is,  moreover,  impossible  to 
see  any  difference  between  the  various  cases  of  sewer  and 
levee  assessments  quoted  by  Mr.  Cooley  as  an  exercise  of 
the  police  power  and  the  cases  of  sewer  and  levee  assess- 
ments quoted  by  him  in  another  chapter  as  falling  under  the 
taxing  power.3  The  whole  distinction,  in  fact,  rests  upon  a 
confusion.  So,  again,  while  both  taxes  and  fees  are  an 

1  Goodnow,  "  Powers  of  Municipalities  respecting  Public  Works,"  Publi- 
cations of  the  American  Economic  Association,  ii.,  pp.  72-79.      Professor 
Goodnow  terms  these  respectively  the  systems  of  legislative  and  of  admin- 
istrative control. 

2  Godard,  Petitioner,  16  Pick.  504,  609,  quoted  by  Cooley,  Taxation,  p. 
589. 

8  Cooley,  Taxation,  pp.  588-591,  compared  with  pp.  616-620. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      273 

exercise  of  the  taxing  power,  because  it  has  frequently  been 
deemed  necessary  to  uphold  license  fees  by  distinguishing 
them  from  taxes,  many  of  the  courts  have  declared  license 
fees  to  be  an  exercise  not  of  the  taxing  power  but  of  the 
police  power,  thus  confusing  taxes  with  the  taxing  power- 
There  is,  as  we  shall  see,  a  decided  difference  between  a 
license  fee  and  a  tax  ;  but  it  is  not  the  one  stated  by  the 
courts.  It  is  this  groping  after  the  real  distinction  between 
fees  and  taxes,  to  be  explained  in  a  moment,  which  has 
led  judges,  not  trained  in  economics,  to  draw  the  line 
between  payments  under  the  police  power  and  those  under  the 
taxing  power.  The  distinction  between  fees  and  taxes  is 
not  synonymous  with  the  distinction  between  the  police  and 
the  taxing  power ;  for  there  are  many  classes  of  fees,  like 
court  fees,  fees  for  legal  documents  and  school  fees,  which 
cannot  possibly  be  put  under  the  police  power. 

While,  then,  it  may  be  expedient  from  the  legal  point  of 
view  to  distinguish  between  the  police  power  and  the  taxing 
power,  ruling  that  the  one  is  for  regulation  and  the  other 
for  revenue,  and  while  the  constitutional  importance  of  the 
police  power,  especially  in  the  United  States,  is  in  many 
respects  considerable,  the  distinction  from  the  economic  and 
fiscal  standpoint  is,  nevertheless,  wholly  unnecessary.  A  tax 
is  no  less  a  tax  because  its  purpose  is  regulation  or  destruc- 
tion ;  and  a  fee  or  payment  for  regulation  brings  in  just  as 
much  revenue  as  a  precisely  identical  fee  imposed  primarily 
for  revenue.  From  the  standpoint  of  finance  the  test  is  not 
whether  the  payment  is  for  regulation,  but,  as  we  shall  see 
later,  whether  it  is  primarily  for  special  benefit  or  primarily 
for  common  benefit ;  that  is,  it  is  a  distinction  not  between 
police  power  and  taxing  power,  but  between  fees  and  taxes. 
In  other  words,  'payments  that  are  legally  put  under  the 
police  power  ought  scientifically  to  be  classed  under  the 
taxing  power. 


274  ESSAYS  IN  TAXATION 

III.    Fees. 

We  come  finally  to  what  is  from  the  fiscal  standpoint  the 
chief  sovereign  power  of  the  state — the  power  of  taxation. 
Expropriation  is  not  fiscally  important,  the  significance  of 
fines  and  penalties  does  not  lie  in  the  financial  domain,  and 
the  police  power,  as  we  have  just  seen,  is  of  no  consequence 
from  the  standpoint  of  revenue  ;  but  the  taxing  power  is  of 
an  entirely  different  nature. 

The  taxing  power  may  manifest  itself  in  three  different 
forms,  known  respectively  as  special  assessments,  fees  and 
taxes.  These  three  forms  are  all  species  of  taxation  in  the 
wider  sense,  so  far  as  they  differ  on  the  one  hand  from 
contractual  revenue  or  quasi-private  income,  and  on  the  other 
hand  from  the  remaining  divisions  of  compulsory  revenue, 
like  expropriation  and  fines.  What  is  common  to  all  three 
is  that  they  are  compulsory  contributions  levied  for  the 
support  of  government  or  to  defray  the  expenses  incurred 
for  public  purposes.  That  is  the  essence  of  the  taxing  power. 
But,  although  they  are  all  forms  of  taxation  in  this  wider 
sense,  the  differences  between  fees  and  special  assessments 
on  the  one  hand,  and  taxes  in  the  narrower  sense  on  the  other, 
are  so  marked  that  they  must  be  put  into  separate  cate- 
gories. Let  us  study  their  characteristics,  taking  up  first 
those  payments,  like  fees,  tolls,  costs  and  charges,  which 
may  be  summed  up  under  the  general  head  of  fees  (the  Ger- 
man G-ebiihren,  the  French  taxes,  the  Italian  tasse). 

The  distinction  between  fees  and  taxes,  although  sometimes 
ascribed  to  Rau,  is  really  much  older.  Adam  Smith  already 
speaks  of  certain  expenses  "  which  are  laid  out  for  the  bene- 
fit of  the  whole  society."  "It  is  reasonable,  therefore,"  he 
adds,  "  that  they  should  be  defrayed  by  the  general  contri- 
bution of  the  whole  society,  all  the  different  members  con- 
tributing as  nearly  as  possible  in  proportion  to  their  respective 
abilities."  These,  as  he  afterward  explains,  are  taxes.  On 
the  other  hand,  he  speaks  of  certain  outlays,  as  for  justice, 
for  "  persons  who  give  occasion  to  this  expense,"  and  "  who 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      275 

are  most  immediately  benefited  by  this  expense."  The 
expenditures,  therefore,  he  thinks,  "may  very  properly  be 
defrayed  by  the  particular  contributions  of  these  persons," 
that  is,  by  fees  of  court.  And  he  extends  this  principle  to 
tolls  of  roads  and  various  other  expenses.1  The  "particular 
contributions "  of  Adam  Smith,  in  distinction  from  general 
contributions,  are  nothing  but  fees  in  distinction  from  taxes. 
The  same  distinction  is  found  several  decades  before  Adam 
Smith  in  the  work  of  Justi.  He,  however,  like  the  other 
Germans  of  his  time,  looked  upon  the  Regalia,  or  lucra- 
tive prerogatives,  as  a  separate  class  ;  and  hence  classified 
public  revenues  into  (1)  domains,  (2)  regalia,  (3)  taxes, 
and  (4)  casual  revenues,  including  prices  and  payments 
for  special  privileges.2  Later  on,  Rau  gave  these  latter 
payments  the  name  of  G-ebiihren  or  fees  ;  but  the  essence 
of  the  distinction  is  to  be  found  in  Justi,  and  still  more 
clearly  in  Adam  Smith. 

A  fee,  then,  is  a  manifestation  of  the  taxing  power.  It 
is  a  compulsory  contribution  for  a  service  in  which  the 
element  of  public  purpose  must  be  present ;  but  it  differs 
from  a  tax  in  several  important  points. 

First,  a  tax  is  levied  as  a  part  of  a  common  burden  ;  a 
fee  is  assessed  as  a  payment  for  a  special  privilege.  The 
basis  of  taxation  is  the  ability  or  the  faculty  of  the  tax- 
payer ;  the  basis  of  a  fee  is  the  special  benefit  accruing 
to  the  individual.  In  the  case  of  a  tax,  this  ability,  it  is 
true,  may  be  influenced  to  a  certain  extent  by  the  oppor- 
tunities or  privileges  or  benefits  received.  But  the  dif- 
ference is  the  test.  In  the  case  of  a  fee,  the  benefit  is 
measurable  ;  in  the  case  of  a  tax,  the  benefit  is  not  sus- 
ceptible of  direct  measurement.  In  the  case  of  a  fee,  the 
particular  advantage  is  the  very  reason  of  the  payment ; 
in  the  case  of  a  tax,  the  particular  advantage,  if  it  exists 
at  all,  is  simply  an  incidental  result  of  the  state  action. 

1  Wealth  of  Nations,  book  v.,  chap,  i.,  part  iv.  (vol.  ii.,  p.  402,  of  Thorold 
Rogers'  edition).     Compare  book  v.,  chap,  i.,  part  ii.  and  iii.  passim. 

2  Justi,  Staatswirthschaft,  2d  edition,  1758,  ii.,  pp.  95,  400-429. 


276  ESSAYS  IN  TAXATION 

The  question  of  special  benefit  was  originally  of  minor 
importance,  the  mediaeval  monarch  exacted  in  the  shape  of 
fees  and  charges  about  what  he  chose,  disguising  exactions 
under  the  mask  of  payments  for  special  privileges.  Even 
there,  however,  it  may  be  said,  not  that  the  idea  of  bene- 
fit was  absent,  but  that  the  monarch  made  himself  the 
judge  of  the  amount  of  benefits.  That  his  despotic  esti- 
mate often  resulted  in  hardship  does  not  alter  the  theory. 
Gradually,  however,  the  idea  of  actual  benefit  came  to  the 
foreground,  until  it  has  finally  become  the  controlling  factor. 

A  second  distinction  between  fees  and  taxes  is  that  a 
fee  does  not  normally  exceed  the  cost  of  the  particular 
service  to  the  individual.  This,  however,  although  com- 
monly made  much  of,  is  of  subordinate  importance.  In 
the  first  place,  it  can  obviously  apply  only  to  those  fees 
paid  in  return  for  some  positive  work  done  by  government. 
The  government,  indeed,  must  always  give  something  in 
return  for  a  fee  ;  but  in  many  cases  it  may  give  only 
a  permission  to  do  something  —  a  permission  which  costs 
almost  nothing,  and  for  which  a  considerable  fee  may  be 
exacted.  The  controlling  consideration  here  is  not  cost, 
but  measurable  special  benefit.  Historically,  we  know  that 
these  special  charges  were  made  entirely  irrespective  of 
cost.1  But  even  in  the  case  of  a  positive  action  by  the 
government,  cost  is  simply  another  method  of  measuring 
special  benefit.2  This  has  been  overlooked,  but  is  none  the 
less  true.  In  all  competitive  private  enterprises  the  benefit 
to  the  individual  is  the  cost.  That  is,  the  amount  which  the 
individual  is  willing  to  pay — and  he  is  the  best  judge  of  the 
benefit  to  be  derived —  is  the  price  ;  and  the  price  is  fixed 
ultimately  by  the  cost  of  production.  The  whole  modern 
theory  of  marginal  utility  as  the  regulator  of  price  is 

1  Professor  Brentano  calls  attention  to  this  historical  fact.     Of.  Faber, 
Die  Entstehung  des  Agrarschutzes  in  England,  p.  68.    Both  fail  to  notice 
the  points  made  in  the  text. 

2  The  cost  here  referred  to  is  at  once  the  cost  to  the  individual  and  the 
cost  to  the  government.     They  are  synonymous,  because  under  the  sup- 
position the  government  gives  its  services  for  cost. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      277 

simply  a  way  of  stating  the  degree  of  special  benefit  to 
the  individual ;  and  the  true  theory  of  price  confesses  that 
marginal  utility  in  competitive  enterprises  resolves  itself 
ultimately  into  cost  of  production.  The  benefit  to  the 
individual,  therefore,  is  the  cost.  As  soon  as  we  have  a 
private  monopoly,  however,  the  benefit  to  the  individual 
diminishes  in  proportion  to  the  sacrifice  he  is  compelled 
to  make  in  paying  more  than  the  cost  of  production ; 
and  the  excess  of  price  over  the  normal  benefit  (as  meas 
ured  by  cost)  represents  to  this  extent  a  tax  on  the  indi- 
vidual. 

The  same  is  true  of  governmental  action.  It  may,  and 
often  does,  happen  that  a  government  is  not  actuated  by 
motives  of  profit,  but,  like  a  private  competitor,  sells  its  ser- 
vices for  cost.  Special  benefit  to  the  individual  and  cost  to 
the  government  are  then  synonymous.  But  if  the  government 
seeks  to  make  a  monopoly  profit  and  charges  more  than  cost, 
then  as  before  the  special  benefit  to  the  individual  may  be 
said  relatively  to  diminish  as  the  charges  increase,  until  finally 
the  exaction  becomes  so  great  that  the  special  benefit  is  merged 
in  the  special  burden  and  the  charge  becomes  not  a  counter- 
payment,  but  a  special  tax.  On  the  other  hand,  the  govern- 
ment may  decide  to  charge  less  than  cost,  or  even  to  offer  its 
services  gratuitously,  in  which  cases  the  special  benefit  to 
the  individual  may  gradually  be  swallowed  up  in  the  com- 
mon benefit.  Here  the  very  reason  of  the  gratuitous  service 
is  that  no  special  benefit  exists,  or  that  it  results  only  inci- 
dentally from  general  state  action.  Thus  we  see  that  special 
benefit  to  the  individual  is  correlative  with  cost  to  the  gov- 
ernment. If  the  charge  is  less  than  cost,  the  special  benefit 
is  pro  tanto  converted  into  a  common  benefit,  until  finally 
there  is  no  charge,  because  no  special  benefit.  If  the  charge 
is  more  than  cost,  the  special  benefit  is  pro  tanto  converted 
into  a  special  burden,  until  finally  the  charge  is  all  tax, 
because  it  is  all  burden,  and  no  special  benefit. 

This  point  of  view  helps  us  out  of  a  difficulty  as  to  the 
line  of  cleavage  between  fees  and  taxes.  Thus,  if  a  charge 


278  ESSAYS  IK  TAXATION" 

is  made  for  the  cost  of  judicial  process,  the  payment  is  a  fee, 
because  of  the  special  benefit  to  the  litigant.  If  no  charge 
is  made,  the  cost  of  the  process  must  be  defrayed  by  gen- 
eral taxation;  and  the  litigant  pays  his  share  in  general 
taxes.  If  the  charge  is  so  arranged  as  to  bring  in  a  consider- 
able net  revenue  to  the  government,  the  payment  by  the  liti- 
gant is  a  tax  —  not  a  general  tax  on  all  taxpayers,  but  a 
special  tax  on  litigants,  like  the  tax  on  lawsuits  in  some  of 
our  Southern  commonwealths.  The  character  of  fee  dis- 
appears only  secondarily  because  the  principle  of  cost  is 
deviated  from,  but  primarily  because  the  special  benefit  to 
the  litigant  is  converted  in  the  first  case  into  a  common 
benefit  shared  with  the  rest  of  the  community,  and  in  the 
second  case  into  a  special  burden.  The  failure  to  grasp  the 
basis  of  this  distinction,  which  is  equally  true  of  other  fees, 
has  confused  many  writers. 

A  third  distinction  between  fees  and  taxes  may  be  found 
in  the  conditions  attached  to  the  service  which  the  govern- 
ment performs.  It  may  be  said  that  in  the  case  of  a  fee  the 
government  does  some  particular  thing  in  return,  while  in 
the  case  of  a  tax  it  gives  no  special  service.  The  particu- 
lar thing  done  by  the  government  in  return  for  a  fee  may  be 
either  the  display  of  some  positive  energy,  as  in  furnishing  a 
water  supply,  or  it  may  be  a  simple  permission  to  do  some- 
thing. The  government  may  create  direct  utilities,  or  it 
may  permit  the  individual  to  create  utilities;  but  in  each 
case  it  demands  a  return  for  the  privilege.  In  the  case  of  a 
tax,  on  the  other  hand,  the  government  simply  refrains  from 
doing  ;  or,  if  it  does  anything  at  all,  does  it  only  as  a  gene- 
ral governmental  action.  This  distinction  applies  to  so- 
called  special  taxes,  as  well  as  to  general  taxes  ;  for  even 
in  the  case  of  a  special  tax,  the  government  does  not 
pledge  itself  to  do  any  special  thing  for  the  individual  as  an 
individual.  It  agrees  to  do  some  special  thing  for  the  com- 
munity or  for  the  particular  class  involved,  but  it  is  wholly 
immaterial  to  the  government  whether  the  individual  avails 
himself  of  the  incidental  advantage  accruing  to  the  class  as  a 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      279 

whole.  Even  in  the  case  of  special  taxes  we  are  not  con- 
fronted with  the  principle  of  give  and  take,  or  quid  pro  quo, 
as  regards  individuals. 

A  further  distinction  that  has  been  very  fruitful  of  confu- 
sion is  that  between  the  business  licenses  or  fees,  and  busi- 
ness taxes.  The  legal  terms  applied  to  such  payments  must 
not  lead  us  astray.  For  instance,  a  given  charge  levied 
on  certain  retail  businesses  is  called  in  various  American 
states  a  fee,  a  license,  a  license  fee,  a  license  tax,  a  special 
tax,  a  specific  tax,  a  privilege  tax  and  an  occupation  tax.1 
A  certain  payment  exacted  from  insurance  companies  is  called 
indifferently  an  insurance  fee,  an  insurance  license,  an  in- 
surance license  fee,  an  insurance  tax  and  an  insurance 
license  tax.  A  certain  payment  imposed  on  some  corpora- 
tions is  called  variously  a  charter  fee,  a  bonus  on  charters,  a 
license  tax,  a  tax  on  certificates,  an  organization  tax,  a  cor- 
poration tax  and  even  a  corporate  franchise  tax.2 

The  real  distinction  between  a  license  charge  and  a  busi- 
ness tax  is  that  the  non-payment  of  a  license  charge 
normally  renders  the  exercise  of  the  business  illegal,  while 
the  non-payment  of  a  business  tax  does  not  render  it  illegal. 
More  broadly,  it  may  be  stated  that  a  license  charge  is  a 
condition  precedent,  while  a  business  tax  is  a  condition  (if 
a  condition  at  all)  subsequent. 

A  license  charge,  however,  may  be  either  a  license  fee  or 
a  license  tax;  3  and  in  order  to  ascertain  which  it  is,  we  must 
fall  back  on  the  preceding  distinctions.  When  the  license 
is  imposed  to  cover  the  cost  of  regulation  or  to  meet  the 
outlay  incurred  for  some  improvement  of  special  advantage 
to  the  business,  it  may  truly  be  said  that  the  licensee  gets 
a  special  benefit  from  the  privilege,  a  special  benefit  measured 

1  Compare  my  monograph  on  Finance  Statistics  of  the  American  Com- 
monwealths, 1889,  pp.  88-96. 

2  Compare  supra,  p.  175. 

8  This  distinction  is  overlooked  by  the  American  legal  writers.  Thus  Black 
on  Intoxicating  Liquors,  §  108,  makes  a  labored  argument  to  distinguish  taxa- 
tion from  license,  while  in  reality  he  is  distinguishing  license  fees  on  the 
one  hand  from  license  taxes  and  business  taxes  on  the  other. 


280  ESSAYS  IN  TAXATION 

by  the  cost.  The  charge  would  then,  as  in  the  common 
case  of  cab  licenses,  be  a  fee.  When,  however,  the  charge 
for  the  license  to  carry  on  a  business,  which  before  the 
imposition  of  the  restrictive  law  was  open  to  any  one,  is 
purposely  so  high  as  to  bring  in  a  distinct  net  revenue  to 
the  government  above  the  cost  of  regulation,  we  can  no 
longer  properly  speak  of  special  benefits  to  the  licensee, 
since  the  special  benefit  is  converted  into  a  special  bur- 
den ;  the  charge  is  then  no  longer  a  license  fee,  but  a 
license  tax.  This  is  the  case  with  some  of  the  so-called 
license  or  privilege  taxes  in  the  Southern  commonwealths.1 
Finally,  if  the  payment  is  not  conditional  upon  taking 
out  a  license,  but  is  assessed  on  certain  elements  of  the 
business,  such  as  purchases,  sales,  capital,  etc.,  as  in  the 
French  patentes,  the  German  G-ewerbesteuer,  and  some  of 
the  American  payments,  then  we  have  not  license  taxes,  but 
business  taxes,  because  the  condition  is  not  precedent,  but 
subsequent.  The  distinction  between  license  tax  and  busi- 
ness tax  is  one  of  condition  of  payment :  the  distinction 
between  license  fee  and  license  tax  is  one  of  benefit  and  cost. 
There  is,  therefore,  some  truth  at  the  basis  of  the  distinc- 
tion drawn  by  the  American  judges  between  the  police  power 
and  the  taxing  power ;  but  it  is  to  be  understood  in  a  sense 
quite  different  from  that  usually  adopted.  The  distinction 
should  really  be  drawn  between  a  license  fee  and  a  license  tax 
on  the  one  hand,  and  between  a  license  tax  and  a  business  tax 
on  the  other.  The  distinction  between  police  power  and  tax- 
ing power  is  not  valid,  because  from  the  broad  scientific 
point  of  view  a  fee  may  be  equally  an  exercise  of  the  taxing 
power,  while  a  tax  is  none  the  less  a  tax  because  it  is 

1  This  is  really  the  basis  of  the  recent  decision  of  the  United  States 
Supreme  Court  in  the  case  of  Harmon  vs.  City  of  Chicago,  Supreme  Court 
Reporter,  xiii.,  no.  10,  p.  306  (Feb.  13,  1893).  A  license  charge  for 
using  the  Illinois  River  is  declared  to  be  a  tax,  and  in  conflict  with  the 
interstate  commerce  provision  of  the  constitution,  because  it  is  not  a  com- 
pensation for  any  specific  improvement.  In  the  latter  case  it  would  be  a 
license  fee  or  toll,  and  perfectly  valid,  as  decided  in  Huse  vs.  Glover,  119 
U.  S.  643. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES       281 

regulative.  When  the  American  judges  hold  that  a  license 
fee  must  "  not  exceed  the  necessary  or  probable  expense 
of  issuing  the  license  and  of  inspecting  and  regulating  the 
business,'' l  they  are  drawing  the  line  between  license  fees 
and  license  taxes,  although  legal  complications  may  compel 
them  to  assert  that  it  is  a  distinction  between  the  police  power 
and  the  taxing  power.  For  instance,  the  decision  that  high 
liquor  licenses  are  not  taxes  —  a  decision  quite  untenable 
from  the  standpoint  of  public  finance  —  is  due  simply  to  cer- 
tain constitutional  limitations,  and  to  the  policy  of  upholding 
such  payments.  Liquor  licenses,  if  high  enough,  are  no  less 
taxes  than  the  Southern  license  or  privilege  taxes ;  and  the 
attempt  to  call  them  license  fees,  in  order  to  uphold  them 
under  the  police  power,  is  the  result  of  a  praiseworthy  but 
palpable  legal  fiction.  To  say,  as  Cooley  does,  that  a  high 
liquor  license  is  only  a  license  fee  covering  the  cost  of  regula- 
tion, because  "  it  is  reasonable  to  take  into  account  all  the 
incidental  consequences  that  may  be  likely  to  subject  the 
public  to  cost "  (such  as  prevention  of  resulting  crime  and 
disorder),  is  a  considerable  stretching  of  the  term.  It  seems 
impossible  to  state  how  much  of  pauperism  and  crime  is  due 
to  drink  and  how  much  to  other  causes. 

The  truth  which  the  judges  have  vaguely  seen,  and 
which  they  have  attempted  to  realize  in  their  decisions,  then, 
is  simply  this  :  a  fee  is  a  payment  for  a  service  or  privilege 
from  which  a  special  measurable  benefit  is  derived,  and  nor- 
mally does  not  exceed  the  cost  of  the  service ;  a  tax  is  a 
payment  where  the  special  benefit  is  merged  in  the  common 
benefit,  or  is  converted  into  a  burden.  A  fee  remains  a  fee, 
whether  levied  under  the  taxing  power  or  the  police  power  ; 
and  a  tax  is  no  less  a  tax  when  classified  under  the  police 
power  than  when -put  under  the  taxing  power. 

It  seems,  then,  that  writers  like  Professor  Bastable,  who 
desire  to  discard  fees  as  a  source  of  revenue  co-ordinate  with 
taxes,  are   taking  a  step   backward,  and  are  abandoning  a 
distinction  dating  back  at  least  to  Adam  Smith, 
i  Cooley,  Taxation,  p.  598. 


282  ESSAYS  IN  TAXATION 

It  is,  however,  useless  to  oppose  the  creation  of  a  class  of 
revenues  co-ordinate  with  taxes;  for,  even  if  we  disregard 
fees,  we  cannot  shut  our  eyes,  as  most  writers  have  done,  to 
the  existence  of  another  important  class  of  compulsory  rev- 
enues which  are  not  taxes.  These  are  known  as  special 
assessments. 

IV.    Special  Assessments. 

It  has  already  been  pointed  out  that  classification  of 
public  revenues  has  depended  upon  historical  conditions. 
Special  assessments  are  a  comparatively  modern  and  a  spe- 
cifically American  development,  although  the  germ  of  the 
system  may  be  found  in  the  Roman  edict :  Construat  vias 
publicas  unusquisque  secundum  propriam  domum.1  In  France 
and  England  they  have  been  so  rarely  used  as  to  escape 
detection,  although  of  late  years  the  policy  of  introducing 
the  principle  more  widely  has  begun  to  be  discussed  in 
England.2  In  Belgium  and  Germany  they  have  been  intro- 
duced in  the  past  few  decades,  and  are  occasionally  men- 
tioned in  the  latter  country  under  the  head  of  Beitrage.* 
Even  so  recent  writers  as  Leroy-Beaulieu  and  Bastable 
ignore  them  completely.  In  the  earlier  books  on  public 
finance  we  find  no  mention  of  them.  Nowhere  do  we  find 

1  Quoted  in  entirely  another  connection  by  Sax,  Die  Verkehrsmittel  in 
Volks-  und  Staatswirthschaft,  i.,  p.  186. 

2  In  France  they  may  be  traced  back  to  1672  and  to  a  more  general  law 
of  1807,  known  as  the  law  on  "I'indemnit6  pour  payement  de  plus-value." 
But  only  about  twenty  to  twenty-five  cases  of  application  are  known.    Com- 
pare Aucoc,  Droit  Administratif,  ii.,  pp.  732  et  seq.    For  the  earlier  cases, 
see  Clement,  La  Police  sous  Louis  XIV.,  p.  144.  — For  England  see  infra, 
chap.  xi. 

8  In  Prussia  they  are  legally  known  as  Inter essentenzuschiisse.  Compare 
Leidig,  Preussisches  Stadtrecht,  p.  375,  and  Loening,  Vemcaltungsrecht,  p. 
680.  Other  forms  of  special  assessments  are  known  as  Deichbeitrage,  and  in 
Baden  as  Soziallasten.  The  whole  system  seems  to  have  received  a  greater 
development  in  Belgium  than  anywhere  else  in  Europe,  and  yet  it  has  not  been 
noticed  at  all.  The  Belgian,  Denis,  does  not  mention  it  in  his  recent  work, 
L'lmpot.  The  details  of  the  system  may,  however,  be  found  in  Leeman'a 
Des  Impositions  Communales  en  Belgique,  2d  edition,  chaps,  v.-x.  He  calls 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES       283 

any  adequate  discussion  of  special  assessments  in  theory  or 
in  practice,  or  any  successful  attempt  to  correlate  them  with 
other  forms  of  compulsory  contributions. 

No  American  who  treats  of  public  finance  as  a  whole  can 
fail  to  be  struck  with  the  importance  of  special  assessments 
in  actual  practice.  To  take  only  two  examples :  in  New 
York  City,  in  1891,  special  assessments  yielded  over  $2,400,- 
000;  while  in  Chicago,  in  1890,  they  yielded  $8,790,443  — a 
sum  actually  larger  than  that  raised  by  taxes.  The  courts 
have  been  filled  with  litigation  respecting  special  assess- 
ments, and  certain  valuable  principles  have  been  slowly 
evolved.  Yet  no  one  has  attempted  to  construct  a  theory  of 
special  assessments,  or  to  assign  them  to  their  proper  place 
in  the  list  of  public  revenues.  Thus  the  theory  of  special 
assessments  has  not  been  worked  out  in  Europe,  because  the 
facts  were  not  deemed  sufficiently  important;  and  it  has  not 
been  worked  out  in  America,  because  there  have  been  almost 
no  American  theorists  in  public  finance.1 

A  special  assessment  may  be  defined  as  a  compulsory  con- 
tribution, levied  in  proportion  to  the  special  benefits  derived, 
to  defray  the  cost  of  a  specific  improvement  to  property 
undertaken  in  the  public  interest.  When  a  new  street  is 
opened,  for  instance,  it  is  deemed  equitable  that  the  ex- 
pense should  not  be  entirely  borne  by  the  whole  community, 
but  that  it  should  be  defrayed  in  part  or  in  whole  by  the 
owners  of  abutting  real  estate,  whose  property  receives  an 
undeniable  benefit  in  the  immediate  enhancement  of  value. 
The  advantages  of  the  particular  government  services  accrue 
in  great  part  to  the  property  owners;  and  it  is  therefore 

them  taxes,  but  confuses  them  continually  with  taxes  proper,  including 
special  taxes. 

1  Since  the  above  words  were  originally  published,  one  of  my  students, 
Dr.  Victor  Rosewater,  now  editor  of  the  Omaha  Bee,  has  completed  his 
monograph  on  Special  Assessments  :  a  Study  in  Municipal  Finance,  which 
appeared  as  vol.  ii.,  no.  3  of  Columbia  University  Studies  in  History,  Eco- 
nomics and  Public  Law.  This  monograph  contains  a  comprehensive  treat- 
ment of  the  whole  subject,  historical,  legal,  statistical  and  theoretical,  and  is 
now  the  chief  authority  on  the  topic. 


284  ESSAYS  IN  TAXATION 

right  that  they  should  bear  the  burden  in  proportion  to  the 
advantages  received.  Without  going  into  the  history  of 
the  system,  we  may  say  that,  beginning  in  New  York  in 
the  seventeenth  century,  it  has  been  well-nigh  universally 
adopted  in  the  United  States.  Its  operation  extends  to 
improvements  like  the  following :  opening,  laying  out, 
grading,  paving  and  repaving,  planking  and  curbing  the 
streets ;  sprinkling  them  with  water,  illuminating  them 
with  gas  and  electric  light,  and  even  ornamenting  them 
with  shade-trees ;  constructing  drains,  sewers,  levees  and 
embankments ;  laying  wire  conduits  and  water  pipes ;  bet- 
tering waterways  and  dredging  rivers ;  laying  out  and 
developing  public  parks,  squares  and  drives.  In  all  these 
cases  the  entire  expense,  or  a  certain  portion  of  it,  is  met 
not  by  general  taxes,  but  by  special  assessments.  We  are 
here  to  consider  the  theory  of  special  assessments. 

In  the  first  place,  special  assessments  represent  an  exercise 
of  the  taxing  power.  In  the  early  days  various  attempts 
were  made  to  justify  them  under  the  power  of  eminent 
domain  and  under  the  police  power ;  but  in  1851  a  leading 
New  York  case1  swept  away  all  these  refinements,  and  de- 
cided that  special  assessments  were  a  constitutional  exercise 
of  the  taxing  power.  The  reasoning  of  Judge  Ruggles  in 
that  case  is  so  convincing  as  to  need  no  comment  or  defence  i 
and  the  whole  development  in  the  United  States  has  since 
proceeded  on  the  line  he  laid  down. 

In  a  special  assessment  the  element  of  public  purpose  must 
always  be  present ;  for  if  levied  solely  for  private  purpose 
it  would  be  an  act  of  confiscation,  not  an  exercise  of  the  tax- 
ing power.  Again,  a  special  assessment  must  be  capable  of 
apportionment :  there  must  be  an  assessment  district,  and 
the  assessment  must  not  be  arbitrary.  The  countless  cases 
which  enforce  these  points  show,  in  short,  that  special  assess- 
ments, like  fees,  are  an  exercise  of  the  taxing  power. 

1  People  vs.  Brooklyn,  4  N.  Y.  419.  Some  of  Judge  Buggies'  obiter  dicta 
on  the  principles  of  taxation  are  open  to  serious  question.  But  as  they 
have  really  nothing  to  do  with  the  point  decided  in  the  case,  we  pass  them  by. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES       285 

Special  assessments,  like  fees,  are  not,  however,  taxes  in 
the  ordinary  or  narrower  sense.  Taxes,  as  we  know,  are 
compulsory  contributions  levied  to  defray  the  expenses  in- 
curred in  the  common  interest,  without  any  reference  to 
particular  advantages  accruing  to  the  taxpayer ;  but  in 
special  assessments,  as  in  fees,  the  services  for  which  the 
expenses  are  incurred  redound  to  the  particular  benefit  of 
the  individual.  The  primary  test  of  a  tax  is  that  it  imposes 
a  common  burden :  the  primary  test  of  a  special  assessment 
is  that  it  implies  a  special  benefit.  From  this  one  great 
distinction  flow  all  the  others,  which  may  be  summed  up 
as  follows :  — 

First.  In  a  special  assessment  the  special  benefit  to  the 
individual  is  measurable.  In  a  tax  the  special  benefit  does 
not  exist,  or,  if  it  exists  at  all,  it  results  incidentally  from 
the  individual's  share  in  the  common  benefit ;  it  is  not 
separately  measurable.  No  one,  perhaps,  will  be  apt  to 
confound  a  special  assessment  with  a  general  tax;  but  there 
is  also  a  clear  line  of  distinction  between  a  special  assess- 
ment and  a  special  tax.  An  adequate  discussion  of  the  rela- 
tion between  a  general  tax  and  a  special  tax  belongs  to  the 
question  of  the  sub-classification  of  taxes  in  particular,  and 
would  lead  us  too  far  astray  here.  But  we  can  say  at  all 
events  this :  a  general  tax,  like  the  ordinary  state  or  local  tax 
in  America,  is  not  levied  for  any  definite,  particular  expendi- 
ture, but  is  assessed  for  general  governmental  purposes  ;  a 
special  tax,  like  the  English  local  rates  or  the  local  taxes 
in  some  American  states,  like  New  Jersey,1  is  assessed  for 
the  accomplishment  of  some  special  task  to  which  the  gov- 
ernment is  pledged,  and  is  levied  on  a  definite  section 
of  the  population.2  The  police  rate,  the  sewer  rate,  the 
poor  rate,  the  lighting  rate,  are  each  levied  for  the  spe- 
cial purpose  and  on  the  definite  class  of  taxables  subject 

1  Compare  Comptroller's  Report  of  the  state  of  New  Jersey  for  1891, 
financial  condition  of  counties,  etc.,  pp.  1-87. 

2  These  taxes  must  of  course  not  be  confounded  with  the  so-called  "  special 
taxes  "  in  some  of  the  Southern  commonwealths,  which  are  known  as  license 
or  privilege  or  business  taxes  in  the  other  commonwealths. 


286  ESSAYS  IN  TAXATION 

to  the  rate.  But  this  special  tax  is  none  the  less  a  veri- 
table tax  ;  it  is  levied  for  a  public  purpose,  it  is  assessed  on 
what  is  deemed  to  be  the  faculty  or  "means"  of  the 
taxpayer  ;  and  there  are  no  particular  benefits  accruing  to 
him  as  an  individual.  Even  if  he  does  perchance  derive 
a  benefit,  it  is  not  a  special,  measurable,  individual  benefit 
apart  from  the  common  benefit  that  the  other  members  of 
the  class  derive ;  it  is  simply  an  incidental  result  of  his 
share  in  the  common  benefit.  In  the  special  assessment, 
on  the  other  hand,  the  special  individual  benefit  is  dis- 
tinctly measurable  and  forms  the  basis  of  the  assessment. 
The  English  local  rates,  for  instance,  might  seem  to  be  in 
no  wise  distinguishable  from  the  American  assessments.  It 
is  a  clear  principle  of  the  English  system  of  local  rates, 
however,  that  "the  exact  measure  of  the  benefit  is  not  the 
measure  of  the  liability  to  be  taxed,"  while  the  reverse 
is  true  in  the  American  system  of  special  assessments.1  In 
other  words,  the  test  of  the  special  assessment  is  measurable 
special  benefit :  the  test  of  the  special  tax  is  special  taxable 
capacity  or  faculty,  just  as  the  test  of  the  general  tax  is 
general  taxable  capacity  or  faculty.  The  distinction  is  quite 
clear ;  yet  the  few  writers  who  have  spoken  of  special  taxes 
at  all  have  almost  universally  confused  them  with  special 
assessments. 

Secondly.  Taxes  may  be  proportional  to  property,  or  to  in- 
come, or  to  expense,  or  to  any  other  test  of  faculty,  or  they  may 
be  progressive  rather  than  proportional ;  special  assessments 
can  never  be  progressive,  but  must  always  be  proportional 
to  benefits.  This  is  the  recognized  principle  in  American 
jurisprudence ;  and  the  only  difficulty  now  is  to  decide 
what  is  to  be  regarded  as  the  most  equitable  standard 
for  the  measurement  of  benefit.  Acreage,  frontage,  value, 
superficial  area  of  the  property  —  all  these  have  been 
upheld  as  proper  guides  to  apportionment,  and  as  constitu- 
tional tests  of  presumptive  special  benefit.  Not  only  are 

1  For  a  fuller  statement  of  the  distinction  between  a  special  tax  and  a 
special  assessment,  see  infra,  pp.  345-350. 


THE  CLASSIFICATION'  OF  PUBLIC  REVENUES       287 

special  assessments  void  when  there  is  no  special  benefit ; 
they  are  also  voidable  when  the  charge  exceeds  the  special 
benefit  ;l  for  to  charge  more  than  the  exact  benefit  would 
be  equivalent  to  taking  private  property  without  due  com- 
pensation. In  the  special  assessment  there  must  be  compen- 
sation ;  in  the  tax  there  is  no  question  of  compensation. 
The  only  matter  in  dispute  in  the  American  courts  is 
whether  the  special  benefit  need  be  actual  or  may  be  pre- 
sumptive ;  the  general  tendency  of  the  decisions  is  to  make 
the  legislative  and  administrative  discretion  rather  wide.2 

Thirdly.  Special  assessments  are  confined  to  specific  local 
improvements,  while  the  sphere  within  which  taxes  operate 
is  in  this  respect  unlimited. 

Fourthly.  For  a  special  assessment  the  government  per- 
forms a  definite,  particular  act  in  return ;  it  is  an  instance 
of  service  and  counter-service,  of  give  and  take.  For  a  tax 
the  government  does  not  pledge  itself  to  do  a  particular  thing 
for  the  particular  individual  in  return.  The  reasoning  here 
is  precisely  the  same  as  that  adduced  above  in  discussing  the 
distinction  between  taxes  and  fees.  A  special  assessment  is 
here  on  exactly  the  same  footing  as  a  fee. 

Fifthly.  Taxation  is  resorted  to  in  order  to  defray  the 
running  expenses  of  government,  and  to  effect  in  time  the 
amortization  of  the  debt ;  while  the  object  of  special  assess- 
ments is  to  provide  for  the  capital  account  —  to  increase,  as 
it  were,  the  permanent  plant  of  the  community.8 

The  distinction  between  special  assessments  and  taxes  has 
been  widely  recognized  in  American  jurisprudence  ;  and  the 
constitutional  limitations  applied  to  taxation  have  generally 
been  declared  inapplicable  to  special  assessments.  As  Cooley 
puts  it,  "  The  overwhelming  weight  of  authority  is  in  favor 
of  the  position  'that  all  such  provisions  for  equality  and 
uniformity  in  taxation  by  value  have  no  application  to 

1  Cf.  the  celebrated  Agens  cases  in  New  Jersey.     State  vs.  Newark,  37 
N.  J.  L.  415 ;  Bogert  vs.  Elizabeth,  27  N.  J.  Eq.  608. 

2  Cf.  Matter  of  Church,  92  N.  Y.  6 ;  Allen  vs.  Drew,  44  Vt.  174 ;  and 
other  cases  cited  in  Rosewater,  Special  Assessments. 

8  Rosewater,  op.  cit.,  p.  129. 


288  ESSAYS  IN  TAXATION 

special  assessments."  Exemptions  from  taxation,  moreover, 
do  not  imply  exemptions  from  special  assessments.  Special 
assessments  are  none  the  less  a  distinct  class  because  in  some 
laws  they  are  called  taxes.  In  some  cases,  in  their  anxiety 
to  uphold  the  distinction,  the  same  courts  interpret  the  word 
"  assessment "  in  the  phrase  "  uniform  rate  of  assessment  and 
taxation  "  sometimes  in  one  way,  sometimes  in  the  other.  That 
is,  when  special  assessments  must  be  put  under  the  taxing 
power  in  order  to  be  upheld,  "  assessment "  is  held  to  be  used 
in  the  general  sense,  and  to  mean  taxation  ;  when  in  other 
cases  special  assessments  can  be  upheld  only  by  being  dis- 
tinguished from  taxes,  "  assessment "  is  held  to  be  used  in 
the  technical  sense,  and  to  mean  something  different  from 
taxation.  All  the  ingenuity  of  the  American  judges  has 
been  needed  to  attain  the  result  now  achieved  —  the  marked 
distinction  between  special  assessments  and  taxes ; l  but  their 
efforts  have  been  sensible,  and  the  result  is  in  accord  with 
the  teaching  of  the  science  of  finance. 

Special  assessments  hence  are  not  taxes.  They  differ 
from  taxes  in  the  same  way  that  fees  differ  from  taxes, 

1  One  recent  case  is  especially  noteworthy  as  illustrative  of  ingenious 
distinction.  The  general  trend  of  authority,  as  we  have  shown,  is  to  give  a 
wide  discretion,  and  to  uphold  assessments  per  front  foot  as  a  good  presump- 
tive test  of  special  benefit.  Yet  in  the  celebrated  Illinois  case  of  Chicago  vs. 
Larned,  34  111.  203  (1864),  the  court  held  that  the  provisions  of  the  constitu- 
tion as  to  uniformity  and  equality  of  taxation  were  unusually  stringent,  and 
were  applicable  also  to  special  assessments.  The  court  was  really  mistaken 
here,  as  the  Illinois  constitution  did  not  differ  from  many  others  where  the  con- 
trary interpretation  was  adopted.  Still,  as  a  consequence  of  their  view, 
assessments  could  be  made  on  each  lot  only  up  to  benefit  actually  proved, 
while  the  remainder  of  the  cost  would  have  to  be  defrayed  by  general  taxes. 
Assessment  by  front  foot  was  held  to  be  invalid.  Yet  later  the  courts 
evaded  this  case  by  a  very  fine  distinction.  The  constitution  of  1 870  gave 
local  authorities  the  right  to  levy  "  special  taxes  for  local  improvement ;" 
and  in  White  vs.  People,  94  111.  613,  the  court  held  that  a  special  tax  was  not 
a  special  assessment,  and  that  a  special  tax  might  exceed  the  actual  benefits 
to  the  particular  lot.  An  assessment  by  front  foot  is  hence  valid,  and  the 
system  in  Illinois  to-day  is  the  same  as  in  other  states.  Of  course  the  "  special 
tax"  of  the  Illinois  constitution  is  simply  the  "special  assessment"  of  other 
states,  and  is  even  known  by  the  latter  name  in  Illinois  itself.  There  is,  as 
we  have  seen,  a  distinction  between  a  special  tax  and  a  special  assessment  ; 
but  it  is  not  the  distinction  drawn  by  the  Illinois  court. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES       289 

since  both  fees  and  special  assessments  rest  on  the  doc- 
trine of  equivalents.  Fees,  special  assessments  and  taxes 
have  points  in  common  in  that  they  are  all  manifestations 
of  the  taxing  power.  Fees  and  special  assessments  have 
additional  points  in  common,  which  they  both  possess 
in  distinction  from  taxes.  But,  finally,  fees  and  special 
assessments  differ  in  some  respects  from  each  other.  We 
have  distinguished  special  assessments  from  taxes ;  it 
remains  to  distinguish  them  from  fees. 

It  may,  indeed,  be  claimed  that  there  is  no  distinction,  and 
that  special  assessments  simply  constitute  a  sub-class  of  fees. 
It  is  true,  as  has  just  been  pointed  out,  that  what  characterizes 
taxes  proper  as  against  the  other  manifestations  of  the  tax- 
ing power  is  general  benefit  as  against  measurable  special 
benefit.  If  we  name  the  first  kind  taxes,  we  might  indeed 
give  to  the  second  kind  some  generic  name.  Special  assess- 
ments would  then  be  simply  a  distinct  sub-class.  But  they 
are  so  extremely  important  and  so  far  overshadow  all  the  other 
cases  of  special  benefit  taken  together,  that  it  seems  advisable 
to  put  them  into  a  separate  category.  Especially  in  the 
United  States,  where  the  judges  are  just  beginning  to 
wrestle  with  the  actual  problems,  it  would  tend  to  confuse 
rather  than  to  clarify,  if  we  put  special  assessments  and  cab 
licenses,  for  instance,  into  the  same  category.  Let  us  then 
attempt  to  point  out  in  what  respects  special  assessments 
differ  from  fees. 

In  the  first  place,  special  assessments  are  levied  only  for 
specific  local  improvements  :  fees  may  be  levied  for  any 
services.  The  field  of  operation  of  special  assessments  is 
restricted  ;  that  of  fees  is  unrestricted. 

Secondly,  special  assessments  are  paid  once  and  for  all  ; 
fees  are  paid  periodically,  according  to  each  successive  ser- 
vice. The  only  qualifications  to  this  statement  are  that 
special  assessments  may,  in  a  few  cases,  be  spread  over  a 
longer  period,  and  may  then  be  payable  by  regular  instal- 
ments ;  while,  on  the  other  hand,  a  fee  is  of  course  paid 
only  once  when  the  service  is  demanded  only  once,  as  in  the 
u 


290  ESSAYS  IN  TAXATION 

case  of  a  marriage  fee.  That,  however,  does  not  invalidate 
the  distinction.  In  the  special  assessment  the  payment  is 
capitalized  in  a  lump  sum,  payable  generally  at  once,  but 
occasionally  by  instalments  ;  in  the  fee,  on  the  other  hand, 
the  payment  is,  so  to  speak,  fragmentary  and  irregular. 
In  a  given  case  there  may  be  a  choice  of  methods.  For 
instance,  in  constructing  a  bridge,  the  cost  may  be  defrayed 
either  by  levying  a  special  assessment  on  the  owners  of 
abutting  property  or  by  charging  tolls  on  those  using  the 
bridge,  who  are  presumably  in  great  part  also  the  owners 
of  abutting  property  or  their  friends  and  dependents.  If 
the  benefits  redound  in  greater  part  to  these  property 
owners,  the  cost  should  be  paid  by  a  special  assessment ;  if 
the  benefits  redound  in  greater  part  to  individuals  who  are 
not  property  owners,  the  cost  should  be  paid  by  a  fee  (toll) ; 
if  the  benefits  are  so  wide-spread  that  the  whole  community 
is  almost  equally  interested,  the  cost  should  be  paid  by 
neither  a  special  assessment  nor  a  fee,  but  by  a  general  tax. 

Thirdly,  a  fee  is  levied  on  an  individual  as  such  :  a  special 
assessment  is  levied  on  an  individual  as  a  member  of  a  class. 
That  is,  in  the  case  of  special  assessments  there  must  always 
be  an  assessment  area  over  which  the  whole  assessment  is 
levied,  to  be  then  further  distributed  according  to  a  definite 
rule  of  apportionment.  It  is,  for  instance,  a  settled  rule  of 
the  American  law,  that  in  assessing  benefits  the  assessors 
cannot  restrict  themselves  to  the  cost  of  the  improvement 
in  front  of  a  particular  lot.1  In  the  case  of  a  fee,  on  the 
other  hand,  the  government  looks  not  to  a  class  or  to  an 
area,  but  to  the  separate  individual. 

Fourthly,  a  special  assessment  must  always  involve  a  bene- 
fit to  real  estate  :  a  fee  is  paid  for  a  service  which  may 
benefit  other  elements  than  real  estate,  such  as  personal 
property,  or  other  attributes  of  the  individual  without  any 
reference  to  property. 

There  is  one  further  distinction,  which,  however,  is  more 
imaginary  than  real.  It  might  be  maintained  that  special 
1  Exparte  Mayor  of  Albany,  23  Wend.  277. 


THE  CLASSIFICATION"  OF  PUBLIC  REVENUES       291 

assessments  are  like  direct  taxes,  and  fees  like  indirect  taxes, 
in  the  sense  of  taxes  on  consumption  or  on  acts  and  commu- 
nication, because  the  former  are  compulsory  and  the  latter 
voluntary.  But  this  distinction  is  badly  expressed,  and 
really  untenable ;  for,  notwithstanding  the  contrary  state- 
ment, which  has  frequently  been  made,  indirect  taxes  are  not 
a  whit  more  voluntary  than  direct  taxes.  It  is  true  that  if 
a  man  chooses  to  go  without  tobacco  he  may  escape  the  to- 
bacco tax  ;  but  it  is  equally  true  that  if  a  man  chooses  to  go 
without  certain  kinds  of  property  or  income,  he  may  escape 
to  that  extent  the  property  tax  or  the  income  tax.  Indirect 
as  well  as  direct  taxes  are  compulsory,  not  voluntary,  contri- 
butions. In  the  same  way,  there  is  no  truth  in  the  statement 
that  a  fee  is  voluntary  and  a  special  assessment  compulsory. 
It  is  true  that  we  do  not  need  to  pay  a  pedler's  license  fee  if 
we  do  not  care  to  peddle;  but.  on  the  other  hand,  we  do  not 
need  to  pay  a  special  assessment  if  we  do  not  care  to  own 
the  land.  Further,  when  the  payment  of  a  fee  is  connected 
with  necessary  every-day  transactions,  as  are  mortgage  regis- 
tration fees  or  marriage  fees,  there  can  be  no  question  of  the 
compulsory  nature  of  the  transaction.  Birth  and  death 
cannot  well  be  termed  voluntary  actions  ;  yet  a  registration 
fee  for  a  birth  or  death  certificate  does  not  differ  in  character 
from  any  other  fee.  Fees  and  special  assessments,  indirect 
and  direct  taxes,  are  all  compulsory  contributions.1 

It  is  clear,  then,  that  there  is  a  line  of  distinction  be- 
tween fees  and  special  assessments,  although  not  so  sharp 
as  between  fees  and  special  assessments  on  the  one  hand  and 
taxes  on  the  other.  There  is  no  danger  of  confusing  them 
in  practice  ;  yet  very  little  has  been  done  to  differentiate 
them  in  theory.  Even  Wagner,  though  compelled  in  the  last 
edition  of  his  work  to  recognize  the  existence  of  "  Beitr&ge" 
mentions  them  in  a  few  lines  as  merely  an  unimportant 

1  Neumann,  who  is  the  only  writer  to  attempt  a  distinction  between  fees 
and  special  assessments,  makes  it  turn  on  a  very  dubious  distinction  between 
direct  and  indirect  taxes.  Die  Steuer  und  das  offentliche  Interesse,  pp.  327, 
334. 


292  ESSAYS  IN  TAXATION 

addendum  to  fees.  Of  course,  it  would  be  easy  to  follow 
Professor  Bastable's  example,  and  deny  the  existence  of 
fees  as  a  separate  class,  in  order  to  avoid  the  "  creation  of  a 
distinct  group  of  state  receipts  co-ordinate  with  that  derived 
from  taxation."1  But  even  he,  when  confronted  with  the 
existence  of  special  assessments,  will  have  to  revise  his 
classification,  and  create  at  least  one  "distinct  group  co- 
ordinate with"  taxes.  And  if  this  one  group  is  separated 
from  taxes,  it  will  be  difficult  to  refuse  to  cut  off  another 
group,  for  the  arguments  that  apply  in  the  one  case  apply 
equally  well  in  the  other. 

V.  Prices. 

We  now  come  to  a  final  problem  which  has  given  rise 
to  considerable  difficulty.  Where  shall  we  class  the  pay- 
ments made  for  services  rendered  by  certain  governmental 
enterprises,  like  canals,  post-office,  telegraph  and  railroads  ? 
Are  they  taxes,  are  they  fees,  are  they  compulsory  payments 
at  all,  or  are  they  not  rather  to  be  called  prices,  and  classed 
with  the  contractual  income  of  the  state  ? 

Some  writers  say  that  if  the  government  goes  into  a  public 
business,  like  the  post-office,  the  charges  are  compulsory ; 
but  that  if  it  goes  into  a  private  business,  like  a  shoe 
factory  or  a  coal  yard,  the  revenue  belongs  to  the  indus- 
trial domain.  This  seems  to  be  a  decided  mistake ;  for 
there  is  no  such  sharp  line  of  demarcation  between  a 
naturally  public  and  a  naturally  private  business.  Every- 
thing depends  on  the  view  taken  for  the  time  being  as  to 
the  policy  of  governmental  interference.  The  post-office 
is  everywhere  in  the  hands  of  the  government,  simply  because 
the  enterprise  arose  at  a  time  when  there  was  no  dispute 
over  the  policy.  The  telegraph,  the  telephone,  and  still 
more  the  railroad  are  controlled  by  the  government  in  some 
countries,  and  by  individuals  in  other  countries,  because 
these  industries  developed  after  the  discussion  as  to  the  limits 
1  Public  Finance,  p.  221. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES        293 

of  governmental  interference  arose.  Where  shall  we  put 
the  gas  industry,  which  in  some  municipalities  is  a  public, 
and  in  others  a  private,  business?  Where  shall  we  put 
the  water-supply  and  the  street-railway  business?  Some 
countries  have  monopolies  of  the  manufacture  of  salt  and  of 
tobacco,  which  are  then  regarded  as  modes  of  taxing  the  peo- 
ple who  use  salt  and  tobacco.  Would  there  be  any  differ- 
ence in  principle  if  the  government  went  into  the  coal 
business  or  into  the  shoe  business,  in  order  to  tax  the  people 
using  coal  or  shoes  ?  It  might  indeed  be  very  bad  policy 
for  the  government  to  extend  its  functions  ;  but  there  is 
no  natural  and  immutable  line  of  cleavage  between  a  public 
and  a  private  business,  between  a  monopoly  of  tobacco  and 
a  monopoly  of  bread  or  of  iron.  The  limit  is  always  fixed 
in  accordance  with  temporary  public  feeling  as  to  the  proper 
social  policy  ;  but  the  question  as  to  how  far  vital  public 
interests  are  at  stake  has  been  answered,  and  will  always 
be  answered,  differently  in  different  countries  and  in  differ- 
ent ages. 

The  distinction,  therefore,  is  not,  as  most  writers  have 
assumed,  dependent  on  the  nature  of  the  enterprise.1  As  a 
matter  of  fact,  the  payment  for  the  same  service  may  be  a 
price  in  one  state,  a  fee  in  a  second,  or  a  tax  in  a  third.  The 
explanation  of  the  difficulty  is  to  be  sought  in  an  elaboration 
of  the  very  principle  which  has  just  been  employed  to  show 
the  difference  between  special  assessments,  fees  and  taxes. 
In  other  words,  the  controlling  consideration  in  the  classi- 
fication of  public  revenues  is  not  so  much  the  conditions 
attending  the  action  of  government  or  the  kinds  of  business 
conducted  by  the  government  as  the  economic  relations  exist- 
ing between  the  individual  and  the  government. 

1  For  instance,  Wagner  classes  telegraph  and  postal  charges  among  fees, 
railroad  charges  among  industrial  revenues.  Schall  limits  fees  to  services  for 
"essential  state  purposes"  (wesentliche  Staatszwecken).  Compare  Schon- 
berg's  Handbuch  der  politischen  Oekonomie,  iii.  (3d  edition),  p.  98.  Roscher 
(Finanzwissenschaft,  p.  22)  and  Vocke  (Die  Abgaben,  Auftagen  und  die 
Steuer,  pp.  223-665)  also  except  payments  for  post,  telegraph  and  railroads 
from  the  category  of  fees. 


294  ESSAYS  IK  TAXATION 

Let  us  attempt  to  make  this  clear  by  taking  up  in  turn 
the  various  classes  of  revenue. 

The  simplest  case  arises  when  government  decides  to  go 
into  a  purely  private  business.  The  government  sees  private 
individuals  making  money  out  of  certain  occupations,  and 
considers  why  it  also  should  not  do  likewise.  It  there- 
fore enters  upon  the  business,  and  conducts  it  in  precisely 
the  same  way  as  would  an  individual.  Such  instances  were 
very  common  in  former  times,  when  governments  carried 
on  all  kinds  of  private  occupations,  such  as  manufacturing 
pottery,  loaning  money,  or  conducting  commercial  enter- 
prises ;  but  in  modern  times  this  has  become  less  usual. 
Many  states,  nevertheless,  still  own  real  estate,  either  rent- 
ing or  utilising  it  and  selling  the  produce  in  the  open 
market;  some  states  still  carry  on  a  banking  business;  and 
others  deal  in  commodities,  like  Holland  in  tobacco,  Chili 
in  guano,  and  India  in  opium.  In  all  such  cases  the  chief 
consideration  with  the  government  is  fiscal;  and  the  charges 
are  precisely  the  same  as  would  be  made  by  private  indi- 
viduals. In  fixing  the  price,  the  government  is  actuated 
by  the  same  motives  that  obtain  in  private  business,  whether 
the  business  be  competitive  or  monopolistic.  It  is  imma- 
terial to  the  purchaser  whether  he  buys  from  the  state  or 
from  a  private  person  ;  for  he  has  to  pay  the  same  in  each 
case.  The  commodity  or  service  supplies  his  own  private 
wants,  and  there  is  nothing  public  about  the  transaction 
except  the  mere  accident  that  the  seller  is  a  public  agent 
rather  than  a  private  person.  The  charge  made  by  the 
government  is  therefore  a  ^wasz-private  price  ;  it  is  a  purely 
contractual  payment,  resting  on  an  agreement  between  the 
government  and  the  purchaser.  The  special  benefit  which 
the  individual  receives  is  to  him  the  controlling  considera- 
tion ;  and  the  matter  of  general  interest  or  of  public  purpose 
is  only  an  incidental  matter. 

We  now  come  to  the  next  case,  where  the  government 
decides,  for  special  reasons  not  purely  fiscal,  to  enter  upon 
certain  enterprises  which  have  more  or  less  of  an  industrial 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      295 

nature.  It  is  found  by  experience  that  the  retention  of 
these  enterprises  in  unregulated  private  hands  is  not  thor- 
oughly satisfactory.  The  government,  therefore,  either  leaves 
these  occupations  to  private  initiative,  but  subject  to  careful 
regulation,  or  takes  such  business  into  its  own  hands. 
The  reason  for  interference  is  not  public  gain,  but  public 
policy  ;  it  is  now  a  matter  of  common  interest,  and  no 
longer  purely  and  solely  of  private  interest. 

The  familiar  examples  of  such  enterprises  are  the  post- 
office,  the  telegraph,  the  telephone,  the  railway,  the  water,  gas 
and  electric-light  supply.  These  are  often  called  economic 
monopolies,  because  in  them  through  the  working  of  eco- 
nomic forces  competition  tends  to  become  entirely  inoperative. 
In  most  cases,  too,  they  can  be  carried  on  only  in  virtue  of  some 
privilege  or  franchise  conferred  by  the  government.  The 
public  interest  is  therefore  admittedly  strong  ;  and  whether 
it  takes  the  shape  of  governmental  regulation  or  of  govern- 
mental ownership  is,  for  our  special  purpose,  immaterial. 

Let  us  assume  the  latter  case.  The  problem  then  arises  : 
What  is  the  nature  of  the  charge  made  by  the  government 
for  the  service  or  for  the  commodity  which  results  from  the 
operation  of  these  enterprises  ? 

The  chief  point  is  still  the  private  interest  of  the  indi- 
vidual. He  buys  his  gas  or  his  telegraph  service  to  satisfy 
his  private  wants,  very  much  as  he  would  buy  it  from  any 
individual  or  corporation.  But  a  new  element  has  entered, 
— the  element  of  public  interest,  the  satisfaction  of  the 
wants  which  one  feels  as  a  member  of  the  community.  The 
very  reason  why  these  enterprises  have  been  made  govern- 
ment enterprises  is  that  the  individuals  who  compose  the 
community  feel  that  they  have  a  common,  public  interest  in 
the  assumption  of  the  business  by  the  government.  They 
believe  in  municipal  water-supply,  for  instance,  because  they 
are  convinced  for  various  reasons  that  this  business  ought 
not  to  be  left  in  private  hands.  The  government,  indeed, 
may  make  a  charge,  which  is  undoubtedly  a  price  paid  by  the 
individual ;  but  it  differs  from  private  prices.  In  the  case 


296  ESSAYS  IN  TAXATION 

of  the  private  business  the  monopoly  seeks  only  the  greatest 
possible  profits ;  in  the  case  of  the  public  monopoly  the  gov- 
ernment seeks  the  greatest  possible  public  utility.  Even 
when  the  government  makes  a  high  charge,  it  does  not  aim 
simply  at  the  maximum  monopoly  profits;  for  the  public 
element  always  modifies  the  charges  in  some  particular.  If 
it  did  not  so  modify  the  charges,  or  at  all  events  give  better 
facilities  for  the  same  charge,  there  would  be  no  reason  for 
the  assumption  of  the  business  by  the  public. 

The  charge  to  the  individual  is  thus  a  price  ;  but,  instead 
of  being  g-wasz-private,  it  is  now  a  public  price.  The  relation 
of  the  government  to  the  individual  is  not  the  same  as  in  the 
preceding  case.  The  special  benefit  to  the  individual,  although 
it  is  still  preponderant,  is  relatively  less  ;  the  public  purpose 
has  become  of  more  importance. 

We  come  now  to  the  really  important  point :  The  feel- 
ings of  the  citizens  may  undergo  a  further  change,  and 
the  government  may  conclude  to  manage  the  enterprise 
in  a  different  way.  The  element  of  private  interest  or 
special  benefit  may  diminish,  and  the  feeling  of  public  inter- 
est may  increase  so  as  to  become  the  controlling  considera- 
tion. The  government,  because  of  these  changed  conditions, 
will  now  decide  no  longer  to  run  the  business  on  the  princi- 
ple of  profits.  It  will  reduce  the  charges  somewhat,  so  as 
perhaps  only  to  cover  the  cost  of  operation,  or  not  even 
to  cover  this  cost.  While  it  will  still  roughly  endeavor  to 
charge  each  individual  according  to  the  benefit  he  derives, 
it  will  still  further  modify  these  charges  in  the  direction  of 
the  public  interest,  charging  less  to  those  who  can  afford  it 
less.  In  other  words,  special  benefit  to  the  individual  is 
still  measurable  and  charged  for  ;  but  since  the  common 
interest  of  the  community  is  now  of  more  importance,  the 
charge  for  special  benefit  may  be  slightly  modified  by  other 
considerations,  as  in  the  case  of  the  postal  service,  where 
newspapers  are  put  into  a  lower  class  than  letters.  The 
charge  to  the  individual  has  now  become  a  fee. 

Finally,  another   change   may  occur.     The  citizens   may 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      297 

become  convinced  that  the  public  purpose  has  become  the 
exclusive  consideration,  and  that  the  special  interest  of  the 
individual  is  swallowed  up  in  the  general   interest.     The 
government  will  now  entirely  abandon  the  principle  of  charg- 
ing according  to  special  benefit,  for  one  of  two  other  methods  : 
it  will  either  make  no  charge  at  all  to  the  individual  for  the 
special  service  ;  or,  if  it  still  makes  a  slight  charge,  it  will 
levy  this  not  according  to  the  principle  of  special  benefits, 
but  primarily  according  to  the  principle  of  faculty  or  ability 
to  pay.     The  expenditure  must  indeed  be  defrayed,  but  it 
will  now  be  met  by  a  general  charge  on  the  whole  com- 
munity, or  by  a  charge  upon  that  section  of  the  community 
which  avails  itself  of  the  service ;  but  even  in  the  latter  case 
it  will  not  measure  the  special  charge  to  the  individual  by  the 
benefits  he  may  personally  receive.    In  other  words,  the  pay- 
ment is  now  a  tax — in  some  cases  general,  in  others  special. 
Let  us  illustrate  this  process :  While  a  railway  is  in  pri- 
vate hands,  the  individual  traveller  or  shipper  pays  a  private 
price.    If  the  government  buys  up  the  railways  and  manages 
them  in  precisely  the  same  way,  the  payment  made  by  the 
individual  is  still  a  price  —  a   ^wasi-private  price,  because 
demanded  by  the  government  acting  as  if  it  were  a  private 
party.     But  the  government,  although  it  still  seeks  to  make 
a  profit,  is  likely  soon  to  introduce  some  changes  in  the  pub- 
lic interest.    Because  of  the  resulting  changed  relations  be- 
tween the  enterprise  and  the  patron,  the  payment  becomes  a 
public  price.     After  a  short  time  the  government  may  reduce 
its  charges  considerably,  barely  covering  the  cost,  and  may 
modify  them  still  further  in   regard   to   individuals  or  to 
sections  of  the  country  by  considerations  of  public  policy. 
The  payment  is  then  practically  a  fee  or  toll.     Finally,  the 
demand  may  be  made  in  the  public  interest,  as  in  Australia  to- 
day, for  free  railway  travel.    The  payment  then  made  by  the 
community  to  defray  the  gratuitous  railway  service  would 
be  a  tax.      In  the  case  of  the  common  highways  and  the 
canals,  this  same  evolution  is  discernible;  and  the  final  stage 
of  free  travel  has  actually  been  reached, 


298  ESSAYS  IN  TAXATION 

As  another  illustration  take  the  water-supply.  At  first 
often  in  the  hands  of  a  private  company,  it  may  then  be 
managed  by  the  city,  but  according  to  the  same  principles. 
Every  one  pays  in  proportion  to  his  consumption,  but  pays 
more  than  it  costs  the  city  to  supply  the  water  ;  the  enter- 
prise is  managed  on  the  principle  of  profits.  Then  comes 
a  change.  The  city,  still  charging  according  to  consumption, 
limits  its  charges  to  cost.  Then  often  conies  another  change; 
and  the  city,  while  still  trying  to  make  both  ends  meet, 
often  charges  each  individual  a  lump  sum,  but  makes  the 
richer  consumer  pay  more  than  the  poorer,  even  though 
he  consumes  no  more.  Finally,  we  reach  the  stage  already 
attained  in  some  European  cities,  and  now  demanded  for 
Detroit  by  Mayor  Pingree,  where  the  water  is  supplied 
to  the  citizens  without  charge,  and  where  the  expense  of 
water-supply  is  put  in  the  same  category  as  the  expense 
of  street  cleaning.  The  charge  for  water-supply  has  thus 
run  through  the  various  stages  —  private  price,  ^wasz-private 
price,  public  price,  fee,  and  tax.  Some  cities,  indeed,  may 
have  jumped  over  the  intermediate  stages,  may  have  started 
with  the  final  stage,  or  may  never  have  reached  this  stage. 
In  fact,  although  this  is  unusual,  the  principle  of  develop- 
ment may  even  be  reversed,  the  public  interest  may  lag,  and 
the  methods  of  private  management  may  again  be  introduced. 
The  principle  itself  is,  however,  everywhere  discernible, 
whether  it  works  forward,  as  it  usually  does,  or  backward, 
as  in  some  exceptional  cases. 

Again,  at  the  present  time  the  charge  for  a  postal  stamp, 
like  a  canal  or  road  toll,  is  almost  everywhere  a  fee ; l  yet 
the  charge  might  be  so  high  that  the  special  benefit  would 
become  a  special  burden,  and  the  payments  would  become 

1  As  early  as  1765  Benjamin  Franklin  perceived,  in  part  at  least,  the  differ- 
ence between  a  fee  and  a  tax.  In  reply  to  the  question  of  the  parliamentary 
committee,  "  Is  not  the  post-office  a  tax  as  well  as  a  regulation  ?  "  he  replied, 
"  No :  the  money  paid  for  the  postage  of  a  letter  is  not  of  the  nature  of  a  tax : 
it  is  merely  a  quantum  meruit  for  a  service  done."  Do  well,  History  of  Tax- 
ation and  Taxes  in  England,  ii.,  p.  46.  Franklin,  however,  failed  to  see 
that  it  might  become  a  tax. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      299 

taxes  on  communication  or  on  transportation.  This  was  very 
common  in  former  times.  Highways  were  at  first  in  private 
hands,  and  the  charge  was  an  extortion  levied  by  the  feudal 
lord.  Later  the  charge  became  a  monopoly  tax  on  transpor- 
tation ;  then  it  became  a  toll  ;  until  to-day  the  charges  have 
generally  disappeared,  and  the  highways  are  managed  on  the 
principle  of  gratuitous  service,  and  are  supported  out  of  the 
proceeds  of  a  general  tax. 

What  has  been  said  of  the  railway  and  of  the  water-supply, 
of  the  postal  and  of  the  highway  systems,  may  be  repeated  of 
all  other  governmental  enterprises  —  the  canal,  the  telegraph, 
the  telephone,  the  gas  and  the  electric  light,  the  horse  rail- 
way and  the  trolley  line,  the  docks,  the  markets  and  the 
ferries.  Moreover,  if  the  socialistic  scheme  is  ever  intro- 
duced, the  same  principle  will  apply  to  all  the  cases  of 
governmental  management  of  what  once  were  private  enter- 
prise. Whether  the  government  ought  to  assume  these 
enterprises  is,  of  course,  a  question  quite  apart  from  this 
discussion  of  the  economic  and  fiscal  nature  of  the  payments 
made  by  the  citizens. 

The  demands  made  by  government  for  supplying  the 
individual  with  commodities  or  services  differ  in  character, 
then,  according  to  the  economic  relations  between  the  gov- 
ernment and  the  individual.  Just  as  a  fee  may  become  a 
tax,  so  it  may  become  a  price  and  vice  versd.  While  a  price 
can  never  be  a  tax,  the  payment  for  the  same  service  may 
take  the  form  of  a  price  in  one  state,  a  fee  in  a  second,  and 
a  tax  in  a  third.  The  real  test  is  the  economic  relation  be- 
tween the  individual  and  the  government,  and  the  relative 
strength  of  the  individual  private  interest  as  compared  with 
the  common  or  public  interest. 

While  there  is-  thus  a  clear  distinction,  chiefly  of  degree, 
between  a  price  and  a  fee,  and  between  a  fee  and  a  tax,  we 
find  in  actual  life  some  payments  which  combine  separate 
elements,  and  which  it  is  difficult  for  any  one  but  a  trained 
observer  to  classify.  Take,  for  instance,  the  combination  of 
price  and  of  tax.  If  the  liquor  business  is  in  private  hands 


300  ESS AyS  IN  TAXATION 

and  the  government  imposes  a  tax  on  each  glass  sold,  the 
individual  pays  a  certain  amount  which  includes  both  price 
and  tax.  If  the  price  of  a  glass  of  liquor  was  five  cents  and 
the  government  levies  a  tax  of  one  cent,  the  individual  pays 
six  cents,  of  which  five  is  the  price,  and  one  is  the  tax. 
When  the  government  has  a  monopoly  of  the  liquor  manu- 
facture or  trade,  as  in  some  countries,  the  relation  is  exactly 
the  same,  and  the  charge  may  be  even  more  than  six  cents. 
In  fact,  that  is  generally  the  reason  why  the  monopoly  is 
introduced ;  but  it  is  only  the  surplus  over  five  cents  that  is 
the  real  tax.  The  same  reasoning  applies  to  other  fiscal 
monopolies,  like  the  tobacco  or  the  sugar  or  the  salt  monopoly; 
the  amount  which  the  individual  pays  over  and  above  what 
he  would  have  to  pay  to  a  private  vendor  is  the  indirect  tax. 
This  might  be  true  also  of  the  charges  for  railway  or  for 
water-supply;  but  at  present  rarely  applies,  because  they  are 
not  fiscal  monopolies.  They  may  be  monopolized  by  the 
government ;  but  in  almost  every  case  the  object  is  not  to 
raise  the  price,  but  to  diminish  the  price  —  not  to  make 
profits,  but  to  secure  general  social  utility.  Yet  just  as  the 
French  and  Italian  governments  impose  taxes  on  the  private 
railway  tickets,  the  amount  of  which  is  separately  printed, 
thus  enabling  the  purchaser  to  distinguish  between  the  price 
and  the  tax,  the  distinction  might'  be  made  if  the  railways 
were  owned  and  managed  by  the  government.  The  pay- 
ments would  be  economically  separable. 

In  the  same  way,  as  has  already  been  abundantly  illus- 
trated, a  given  payment  may  include  a  fee  and  a  tax. 
Governments,  however,  do  not  usually  make  this  sharp  dis- 
tinction. For  instance,  some  American  states  speak  of  insur- 
ance fees  ;  other  states  call  the  identical  payments  insurance 
taxes.  In  some  of  the  Southern  states  agricultural  fees  are 
sometimes  called  fertilizer  taxes  ;  and  on  the  continent  the 
terms  "fees"  and  "taxes"  are  often  indiscriminately 
applied.  Practically,  this  may  not  always  be  of  great  impor- 
tance ;  but  in  theory  the  distinction  is  clear,  and  it  is  begin- 
ning to  be  recognized  by  the  courts. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      301 

A  more  difficult  and  more  confusing  case  arises  when  one 
payment  is  levied  in  the  form  of  another,  as  when  a  public 
price  is  levied  in  the  shape  of  a  tax.  Take  for  instance  the 
water  or  the  gas  supply.  In  Europe,  when  the  towns  bought 
out  the  private  water  or  gas  companies,  they  at  first  con- 
tinued, as  some  do  yet,  to  charge  according  to  individual 
consumption.  In  some  cases,  however,  for  purposes  of  con- 
venience, they  assumed  that  each  household  would  use 
a  certain  quantity  ;  and  as  some  of  the  local  taxes  were 
levied  on  the  occupier,  they  simply  added  a  certain 
amount  to  the  tax,  as  in  some  English  towns  where  a 
special  water  rate  is  levied  like  the  other  local  rates,  or  as  in 
Austria  where  an  addition  is  made  to  the  local  tax  on  house 
rent.  The  payment  is  nevertheless  a  price,  and  not  a  tax ; 
for  if  more  than  the  assumed  normal  quantity  is  used  by  any 
one,  especially  by  a  business  man  or  by  a  factory  owner,  the 
charges  are  increased  according  to  the  consumption.  If  the 
charges  were  reduced,  or  if  all  idea  of  special  benefit  were 
abandoned  and  the  charge  were  assessed  on  the  whole  com- 
munity or  on  part  of  the  community  irrespective  of  the  rela- 
tive quantities  consumed,  then  the  payment  might  become 
a  fee  or  even  a  tax,  whether  general  or  special.  As  a 
matter  of  fact,  however,  in  most  places  to-day  the  payment 
is  still  a  price,  even  though  sometimes  levied  in  the  shape 
of  a  tax.  Thus,  the  English  have  a  separate  class  of  munici- 
pal revenues  called  income  from  "  gas  and  water  undertak- 
ings," which  shows  that  the  distinction  is  dimly  recognized. 
In  New  York  the  charge  for  Croton  water  is  technically 
called  the  "water  rate"  or  "water  rent,"  although  most 
people  call  it  the  water  tax,  and  confound  it  with  a 
genuine  tax.  Here,  it  is  true,  this  "  rate  "  is  paid  sepa- 
rately; but  in  fiome  of  the  European  cities,  for  pur- 
poses of  convenience,  it  is  simply  added  to  an  existing 
tax.  Nevertheless  so  long  as  the  economic  relation  of 
individual  to  the  government  is  different,  the  charges, 
even  though  confused  under  the  same  appellation,  are  really 
distinct. 


302  ESSAYS  IN  TAXATION 


VI.    Conclusions. 

To  sum  up  the  preceding  discussion,  we  find  that  under 
actual  conditions  all  public  revenues  are  either  gratuitous, 
contractual  or  compulsory  contributions  ;  that  the  compulsory 
contributions  are  levied  in  virtue  of  the  power  of  eminent 
domain,  of  the  penal  power  (either  as  a  separate  power  or  as 
the  fiscally  important  part  of  the  police  power),  or  of  the 
taxing  power  ;  and,  finally,  that  the  taxing  power  manifests 
itself  in  the  three  forms  of  fees,  special  assessments  and  taxes. 

In  regard  to  the  charges  known  as  prices,  there  is  no  doubt 
that  we  must  put  quasi-private  prices  under  the  head  of 
contractual  payments ;  but  public  prices  —  the  charges  made 
for  industrial  enterprises  under  certain  conditions  —  occupy 
a  middle  position,  and  might  be  called  semi-compulsory. 
If  the  government  manages  an  enterprise  just  like  an  in- 
dividual, the  price  is  virtually  a  contractual  payment ;  if 
the  government  makes  the  whole  community  or  part  of  the 
community  pay,  it  is  a  compulsory  payment;  but  if  the 
government  employs  the  intermediate  principle  of  charge, 
the  payment  is  neither  wholly  contractual  nor  wholly  com- 
pulsory, but  contains  elements  of  each.  The  classification 
would  then  be  as  follows  :  — 

Gratuitous Gifts. 

Contractual .     .    Public  Property  and  Industry    Prices. 

Eminent  Domain      ....    Expropriation. 

Penal  Power. Fines  and  Penalties. 

Compulsory       -  (  Fees. 

Taxing  Power -I  Special  Assessments. 

[  Taxes. 

But  if  the  real  distinction  is,  as  we  have  suggested,  the 
economic  relation  of  the  individual  to  the  government,  the 
classification  of  charges  would  depend  upon  the  impor- 
tance of  the  individual  interest  measured  by  the  special 
benefit  to  the  individual,  as  compared  with  the  common 
interest  or  public  purpose  measured  by  the  ability  of  the 
individual  to  contribute  to  public  charges.  In  the  one  case 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES      303 


the  individual  is  the  chief  or  only  factor ;  in  the  other  case 
the  individual  sinks  his  own  importance  in  the  common 
welfare  of  the  community,  and  whatever  benefits  he  derives 
come  to  him  only  incidentally  as  a  result  of  his  membership 
in  the  community.  At  one  extreme  lie  prices,  which  depend 
upon  the  relation  of  the  government  to  some  particular 
industry  or  individual ;  at  the  other  extreme  lie  taxes,  which 
depend  upon  the  relation  of  the  government  to  all  industries 
or  individuals  ;  midway  between  these  extremes  lie  fees. 
From  this  point  of  view,  if  we  omit,  as  of  no  importance, 
expropriations  and  fines,  there  are  only  three  great  classes  : 
vzz.,  prices,  fees  and  taxes.  The  essential  characteristic  of  a 
fee  is  the  existence  of  a  measurable  special  benefit,  together 
with  a  predominant  public  purpose  :  the  absence  of  public 
purpose  makes  the  payment  a  price ;  the  absence  of  special 
benefit  makes  it  a  tax. 

As  these  elements  are,  however,  present  in  varying  degree 
in  different  payments,  the  charges  shade  off  into  each  other 
almost  imperceptibly,  forming  intermediate  classes  which  are 
of  great  practical  importance.  Thus  the  public  price  has 
certain  elements  of  the  price  and  certain  elements  of  the  fee  ; 
but  it  is  of  sufficient  importance  to  warrant  its  separation 
in  a  distinct  category.  Again,  as  we  have  seen,  a  special 
assessment  has  many  points  in  common  with  the  fee,  but 
has  a  decided  significance  of  its  own.  Our  final  classifica- 
tion would  then  be  as  follows  :  — 


1.  Special  benefit  the  exclu- 

sive consideration. 

2.  Less  special    benefit,   al- 

though still  preponder- 
ant. 

3.  Special   benefit    measur- 

able. 

4.  Special  benefits   still  as- 

sumed. 

6.  Special  benefits  only  an 
incidental  result. 


Public  purpose  inciden-    Quasi-private  Price. 

tal. 
Public  purpose  of  some    Public  Price. 

importance. 


Public  purpose  of  still 
greater  importance. 

Public  purpose  the  con- 
trolling consideration. 

Public  purpose  the  ex- 
clusive consideration, 
principle  of  faculty  or 
ability. 


Fee. 


Special  Assessment. 


Tax. 


304  ESSAYS  IN  TAXATION" 

The  above  classification  would  result  in  the  following 
definitions :  — 

A  quasi-private  price  is  a  voluntary  payment  made  by  an 
individual  for  a  service  or  commodity  sold  by  the  government 
in  the  same  way  as  a  private  individual  would  sell. 

A  public  price  is  a  payment  made  by  an  individual  for  a 
service  or  commodity  sold  by  the  government  primarily  for 
the  special  benefit  of  the  individual,  but  secondarily  in  the 
interest  of  the  community. 

A  fee  is  a  payment  to  defray  the  cost  of  each  recurring 
service  undertaken  by  the  government  primarily  in  the  public 
interest,  but  conferring  a  measurable  special  advantage  on 
the  fee-payer. 

A  special  assessment  is  a  payment  made  once  and  for  all  to 
defray  the  cost  of  a  specific  improvement  to  property  under- 
taken in  the  public  interest,  and  levied  by  the  government  in 
proportion  to  the  particular  benefit  accruing  to  the  property 
owner. 

A  tax  is  a  compulsory  contribution  from  the  person  to  the 
government  to  defray  the  expenses  incurred  in  the  common 
interest  of  all,  without  reference  to  special  benefits  conferred. 

NOTE.  —  Just  as  this  chapter  is  going  to  j>ress  the  second  edition  of  Basta- 
ble's  Public  Finance  reaches  me.  In  an  appendix  to  his  chapter  on  Classifi- 
cation, Professor  Bastable  discusses  the  general  theory.  He  refers  only  to 
my  first  article,  published  in  1893,  and  ignores  the  second,  which  changed 
the  theory  in  some  points.  In  not  accepting  the  distinction  between  fees 
and  taxes,  Professor  Bastable  puts  himself  entirely  out  of  touch  with  all 
modern  writers  on  finance  outside  of  France.  In  not  accepting  the  dis- 
tinction between  special  assessments  and  taxes  he  shows  that  he  is  not  fully 
alive  to  the  theoretic  importance  of  the  "  Betterment "  question  in  England, 
which  is  discussed  in  chap.  xi.  of  this  work.  As  to  the  question  at  issue  io 
the  treatment  of  prices,  I  am  content  to  abide  by  the  above  exposition,  which 
is  really  not  touched  at  all  by  Professor  Bastable's  criticism. 

NOTE  or  SD  ED.  —  It  is  gratifying  to  see  that  the  French  and  Italian 
writers  have  now  adopted  what  is  fundamental  in  the  above  chapter.  See 
Leroy-Beaulieu,  Traite  de  la  Science  des  Finances  (6th  ed.,  1899),  I.,  chap, 
vii.  ;  and  Graziani,  Instituzioni  di  Scienza  della  Finanze,  1897,  Book  IV., 
chaps  i.  and  v. 


CHAPTER  X. 

BECENT   REFORMS   IN  TAXATION. 

INDUSTRIAL  democracy  is  responsible  for  many  changes, 
but  few  are  more  significant  than  those  effected  in  the  fiscal 
methods  of  recent  times.     In  framing  these  newer  systems 
modern  nations  have  been  confronted  by  two  fundamental 
problems.      The    first   is   that    of    bringing    about    greater     / 
justice  in  distributing  the  weight  of  taxation  among  differ- 
ent classes  of  the  community  ;    the  second  is  that  of   cor-    , 
jrectly  apportioning  the  burdens  among  the  various  spheres 
of  government. 

The  second  problem,  although  of  less  importance  in 
national  than  in  federal  states,  has  everywhere  attracted  an 
increasing  amount  of  attention,  owing  to  the  demands  made 
by  industrial  life  upon  political  organizations,  and  to  the 
growing  complexity  in  the  relations  between  co-ordinate  and 
subordinate  governments.  In  former  times,  when  local 
expenditures  were  insignificant,  and  when  the  geographical 
aspect  of  industrial  relations  was  simple  in  the  extreme, 
the  question  of  the  due  apportionment  of  public  revenues 
among  independent  or  overlapping  jurisdictions  scarcely 
existed. 

Important  though  this  be,  the  growth  of  industrial  democ- 
racy has  brought  into  still  more  prominent  relief  the  diffi- 
culties  of   the   first   problem.     Revenue   methods,  as  they 
came  down  to  us   from   bygone   centuries,  were   defective 
in  one  of  two  ways.     In  some  cases  they  were  simply  survi-  v 
vals  of  a  system  originally  just,  but  which  was  calculated  for 
more  or  less  primitive  economic  conditions,  or  at  all  events    ^ 
for  an  economic   life  which,  whether  primitive  or  not,  was 
x  305 


306  ESSAYS  IN  TAXATION 

fundamentally  different  from  that  of  modern  industrial 
society.  Since  political  conditions,  and  therefore  fiscal 
measures,  depend  in  last  resort  largely  on  social  and  eco- 
nomic relations,  it  was  but  natural  that  the  revenue  system 
should  become  antiquated,  and  that  what  was  conceived  in 
justice  should  ripen  into  practical  injustice.  In  many  places 
to-day  the  fiscal  demands  of  the  new  social  democracy  are 
legitimate  protests  against  the  continuance  of  mediaeval 
survivals  in  modern  life. 

In  other  cases,  revenue  systems  were  painfully  lacking  in 
another  way.  It  is  unfortunately  true  that  the  dominant 
social  class  has  often  succeeded  in  strengthening  its  hold  by 
thoroughly  selfish  fiscal  expedients.  In  such  cases  there  was 
no  pretence  of  equity  even  in  the  original  imposition  of  the 
system.  It  did  not  need  to  grow  bad,  because  it  was  bad 
from  the  very  start ;  it  was  based  not  on  justice,  but  on 
might.  With  the  growth  of  industrial  democracy,  however, 
the  maintenance  of  the  old-time  abuses  became  increasingly 
difficult ;  one  by  one  they  were  recognized  as  such,  to  be 
lopped  off  at  the  first  opportunity.  In  order  to  establish  the 
long-delayed  equities,  it  was  necessary  not  only  to  pull  down 
but  to  build  up.  Some,  at  least,  of  the  recent  changes  which 
in  themselves  seem  extremely  radical,  will  therefore  appear 
less  extreme  when  regarded  as  parts  of  a  larger  whole 
—  as  a  sort  of  compensation  for  what  there  is  still  left  of 
injustice  in  existing  systems. 

Thus  it  is  that  tax  reform  is  everywhere  in  the  air. 
Demanded  in  some  countries  because  of  the  divergence 
between  economic  conditions  and  fiscal  methods,  it  is  urged 
in  others  as  a  concession  to  those  who  have  hitherto  had  less 
than  justice.  In  both  cases  it  is  a  product  of  modern  industry 
and  of  modern  democracy. 

In  this  chapter  it  is  proposed  to  call  attention  to  the 
great  changes  recently  introduced  in  such  widely  differ- 
ent countries  as  England  and  Holland,  New  Zealand  and 
Prussia  —  changes,  all  of  them  effected  within  a  period  of 
scarcely  more  than  twelve  months,  and  springing  from  the 


RECENT  REFORMS  IN  TAXATION  307 

same  general  desire  to  realize  the  principles  of  justice  in  the 
relation  of  the  citizen  to  the  public  purse. 


I.    England. 

As  in  so  many  other  domains  of  political  science,  England 
has  here  again  taken  the  lead.  The  English  are  not  much 
given  to  abstract  reasoning  in  politics  ;  but  in  the  practical 
working  out  of  political  ideals,  England  has  usually  led  the 
way.  In  finance  she  has  taken  a  similar  lead.  She  was  the 
first  important  nation  to  restrict  the  scope  of  taxes  on  con- 
sumption and  to  introduce  the  income  tax  ;  and  at  the  pre- 
sent time,  while  scientists  the  world  over  are  debating  the 
problem  of  lessening  the  burdens  on  the  lower  and  middle 
classes,  she  boldly  takes  steps  which  in  many  other  countries 
would,  to  say  the  least,  be  deemed  premature.  The  three 
great  reforms  just  accomplished  in  England  are  the  extension 
of  the  inheritance  tax,  the  introduction  of  the  progressive 
principle,  and  the  increase  of  the  minimum  of  subsistence. 
Let  us  discuss  these  in  turn. 

The  principle  of  the  inheritance  tax  is  not  new  in  Eng- 
land ;  but  its  application  has  hitherto  been  very  unsatis- 
factory. What  are  generally  called  the  death  duties  were 
until  the  recent  change  composed  of  the  following  elements  : 
(1)  probate  duty,  a  tax  of  about  three  per  cent  on  personal 
property  passing  by  will  or  intestacy  ;  (2)  account  duty,  a 
similar  tax  on  gifts  of  personalty ;  (3)  legacy  duty,  prac- 
tically a  tax  on  collateral  successions  to  personalty,  graded 
according  to  relationship  ;  (4)  succession  duty,  as  altered 
in  1888,  a  tax  on  realty,  settled  personalty  and  leaseholds, 
with  higher  rates  for  collaterals  than  for  lineals  ;  (5)  estate 
duty,  an  additional  tax,  since  1889,  of  one  per  cent  on  all 
estates,  real  and  personal,  over  .£10,000.  These  five  taxes 
really  consisted  of  two  classes  :  the  one,  represented  by  the 
probate  duty,  being  a  tax  on  the  total  amount  of  the  prop- 
erty, irrespective  of  the  manner  in  which  it  was  divided,  or 
of  the  persons  to  whom  it  went ;  the  other,  represented  by 


308  ESSAYS  IN  TAXATION 

the  legacy  and  succession  duties,  being  a  tax  not  on  the 
body  of  the  estate,  but  on  the  separate  shares  received  by 
collaterals  and  outsiders.  These  five  taxes  constituted  a 
complex  whole,  bristling  with  anomalies  and  inequalities, 
of  which  the  most  important  was  the  distinction  made 
between  realty  and  personalty,  the  latter  not  only  being 
taxed  more  heavily,  but  being  subject  to  more  complicated 
and  burdensome  rules.  The  act  of  1894 1  endeavors  to 
remove  these  inequalities  by  imposing,  in  lieu  of  most  of  the 
previously  existing  taxes,  a  new  estate  duty. 

This  estate  duty  is  a  tax  on  the  capital  value  of  all 
property,  real  or  personal,  which  passes  on  the  death  of  any 
person.  The  taxes  abolished  are  the  probate  duty,  the 
account  duty,  the  estate  duty  of  1889,  the  succession  duty 
on  lineals  and  the  additional  succession  duty  of  1888,  all 
of  which  merged  into  the  new  estate  duty.  The  only  old 
duties  which  continue  are,  as  we  shall  explain  in  a  moment, 
the  legacy  duty  and,  in  certain  cases,  the  succession  duty. 

Under  the  former  system  personal  property  was  rated  at 
its  capital  value,  but  realty  was  estimated  at  a  fictitious  sum 
according  to  the  annual  value  and  the  varying  degrees  of 
interest  in  the  property.  In  some  cases  the  tax  was  charged 
only  on  the  value  of  a  life  interest  in  the  property  ;  and 
where  there  was  no  annual  value,  as  in  the  case  of  lands 
held  for  speculation,  there  was  no  tax  at  all.  All  these 
differences  are  removed  by  the  new  tax,  which  is  levied  on 
the  market  value  of  the  property.  In  the  same  way  the  tax 
on  realty  could  formerly  be  paid  in  instalments,  while  that 
on  personalty  was  paid  in  a  lump  sum  ;  but  now,  in  order  to 
equalize  the  taxes,  interest  is  charged  on  the  amounts  remain- 
ing due  until  the  final  instalment  is  paid.  Again,  whereas 
formerly  the  instalments  payable  on  realty  lapsed  with  the 
death  of  the  person  primarily  liable,  they  are  now  a  charge 

*  The  Finance  Act,  1894,  57  and  58  Viet.  ch.  30.  Cf.  A.  T.  Layton,  The 
Finance  Act,  1894,  in  relation  to  the  New  Estate  Duties,  with  introduction 
and  explanation.  See  also  Table  of  Income  Tax  imposed  by  the  Finance  Act, 
1894,  with  full  text  of  act  relating  to  Income  Tax  and  notes  of  explanation. 


•     RECENT  REFORMS  IN  TAXATION  309 

on  the  estate  and  cannot  be  avoided.  Finally,  the  tax  applies 
to  all  death-bed  gifts,  which  are  defined  to  comprise  any  gift 
of  realty  or  personalty  made  within  twelve  months  of  death. 

It  is  somewhat  confusing  to  find  side  by  side  with  this 
estate  duty  a  so-called  settlement  estate  duty ;  but  the  ex- 
planation is  simple.  It  is  a  common  practice  in  England 
to  tie  up  property  by  means  of  settlements,  so  that  the  bene- 
ficiary is  not  at  liberty  to  dispose  of  the  property  itself,  but 
enjoys  only  some  interest  in  it,  whether  for  life  or  for  a  term 
of  years.  It  is  readily  perceived  that,  if  each  beneficiary 
were  called  upon  to  pay  the  tax  on  the  total  value  of  the 
estate,  an  injustice  would  result,  especially  if  there  should 
be  more  than  one  devolution  under  the  same  settlement.  It 
is  therefore  provided  in  the  new  law  that  the  estate  duty 
shall  be  payable  only  once  on  the  value  of  the  property, 
which  shall  then  be  exempt  from  further  payment  during  the 
continuance  of  the  settlement.  In  consideration  of  this  ex- 
emption and  in  order  to  obviate  in  part  any  diminution  in 
the  total  yield,  an  additional  tax  of  one  per  cent,  called  the 
settlement  estate  duty,  is  imposed  on  the  principal  value  of 
the  property  so  settled.  An  exception  is  made  in  the  case 
of  husbands  and  wives ;  and  it  is  further  provided  that  the 
additional  duty  shall  not  be  payable  more  than  once  during 
the  continuance  of  the  settlement. 

Another  point  worth  mention  involves  the  question  of 
double  taxation.  In  the  original  draft  it  was  proposed  to  tax 
the  property,  wherever  situated,  of  a  person  domiciled  in 
Great  Britain.  It  was  pointed  out,  however,  that  this  might 
involve  double  taxation  where  the  foreign  country  itself  im- 
posed an  inheritance  tax  on  the  property  lying  within  its 
borders.  The  bill  was,  therefore,  amended  so  as  to  permit 
the  amount  of  thb  foreign  tax  to  be  deducted  from  the  sum 
payable  by  the  estate  in  England.  This  is  a  simple  solution 
of  the  question.  It  may  also  be  added  that  the  tax  does  not 
apply  to  property  left  to  the  central  or  local  governments,  to 
universities,  to  certain  pensions,  or  to  single  annuities  not 
exceeding  £25. 


310  ESSAYS  IN  TAXATION 

The  most  significant  feature  of  the  new  estate  duty  is 
the  final  acceptance  of  the  graduated  scale  or  the  system  of 
progressive  taxation.  Under  the  preceding  laws  there  was 
indeed  an  exemption  for  very  small  sums  ;  but  that  did  not 
mean  progressive  taxation  proper.  In  the  present  law  the 
tax  begins  with  a  rate  of  one  per  cent  and  increases  in 
twelve  successive  stages  until  it  reaches  eight  per  cent. 
Estates  under  £100  are  not  taxed  at  all ;  from  £100  to  £500 
the  rate  is  one  per  cent,  but  so  arranged  that  estates  under 
£300  make  a  fixed  payment  of  30s.,  while  estates  between 
£300  and  £500  are  charged  a  fixed  sum  of  50s.  Obvi- 
ously the  rate  is  more  than  one  per  cent  on  the  lower  figures 
of  each  class.  Above  £500  the  rate  increases  until  the 
maximum  rate  is  reached  at  estates  over  one  million  pounds.1 
Even  these  figures  do  not  adequately  represent  the  real 
charge ;  for  it  must  be  remembered  that,  in  addition  to  this 
new  estate  duty,  there  still  exist  a  legacy  duty  and  a 
succession  duty.  The  legacy  duty  is  a  tax  at  the  rate  of 
three,  five,  six  and  ten  per  cent,  graded  according  to 
relationship  on  personal  property  going  to  collaterals.  The 
succession  duty  as  changed  by  the  new  law2  is  a  similar 

1  The  exact  figures  are :  — 

Over  £100  to  £500  1% 

"  500  1,000  2% 

"  1,000  10,000  3% 

"  10,000  25,000  4% 

"  25,000  50,000  4J% 

"  50,000  76,000  5% 

"  76,000  100,000  5£% 

'•  100,000  150,000  6% 

"  150,000  250,000  6J% 

"  250,000  500,000  7% 

500,000  1,000,000  7^% 

"  1,000,000  8% 

a  Under  the  original  law,  the  rates  were  as  follows :  — 

Lineal  issue  and  ancestors 1% 

Brothers  and  sisters  and  their  descendants      ....    3% 

Uncles  and  aunts       6% 

Great  uncles  and  aunts 6% 

Other  persons       10% 


RECENT  REFORMS  IN  TAXATION  311 

tax  applicable  to  realty.  The  two  duties  together  form 
a  collateral  inheritance  tax,  which  must  be  paid  in  ad- 
dition to  the  estate  duty,  with  the  important  exception 
that  estates  not  exceeding  .£1000  are  subject  only  to  the 
latter.  The  net  result  is  that  the  rate  of  inheritance  tax 
varies  from  one  to  eighteen  per  cent  of  the  value  of  the 
property. 

These  are  remarkable  figures,  considerably  exceeding  those 
to  be  found  until  recently  in  any  other  important  country.1 
When  almost  one-fifth  of  the  property  is  taken  by  the  state, 
as  is  the  case  with  large  fortunes  going  to  outsiders,  we 
are  approaching  Bentham's  principle  of  escheat.  Com- 
pared to  the  paltry  amounts  levied  before  1898  by  inheri- 
tance taxes  in  America,  the  English  figures  are  certainly 
striking.  The  introduction  of  the  progressive  principle  was 
indeed  hotly  opposed,  and  the  familiar  cry  of  socialism  was 
again  raised,  but  all  in  vain;  for  the  Chancellor  of  the 
Exchequer  regarded  the  principle  of  progression  as  firmly 
established  by  the  weight  of  recent  economic  authority. 
He  even  went  so  far  as  to  say  that  it  was  equally  appli- 
cable in  principle  to  the  income  tax,  and  that  the  sole 
reason  for  his  not  introducing  it  there  was  of  an  adminis- 
trative nature.2  The  definite  acceptance  of  the  progressive 

But  as  lineal  issue  and  ancestors  were  exempted  when  the  property  paid 
probate  duty,  so  the  exemption  now  continues,  since  the  new  estate  duty 
replaces  the  old  probate  duty.  The  succession  duty  was  levied  at  a  higher 
rate,  and  under  different  conditions ;  but  it  is  now  exactly  the  same  as  the 
legacy  duty.  They  are  maintained  as  separate  duties  simply  because  of  the 
body  of  legal  decisions  that  has  grown  around  them. 

1  In  some  of  the  Australian  colonies  the  rates  are  slightly  higher.     In 
Victoria  estates  of  £100,000  pay  ten  per  cent  direct  tax  ;  and  in  Queensland 
the  highest  rate  for  collaterals  is  twenty  per  cent.     The  Swiss  canton  of  Uri 
goes  even  higher.     For  the  new  American  tax,  see  above,  p.  135. 

2  In  answer  to  the  question  why  the  income  tax  should  not  be  graduated, 
he  replied  :   "In  principle  there  is  nothing  to  be  said  against  such  a  system  ; 
indeed  there  is  every  argument  in  its  favor.     The  difficulties  which  lie  in  its 
way  are  of  an  administrative  and  a  practical  nature,  which  as  yet  I  have 
not  been  able  to  find  means  to  overcome."  —  Budget  Speech,  April  16, 1894, 
Hansard,  p.  502.     The  argument  is  similar  to  that  contained  in  my  work  on 
Progressive  Taxation,  p.  208. 


312  ESSAYS  IN  TAXATION 

principle  in  English  politics  marks  a  most  important  step 
in  the  history  of  public  finance.1 

Side  by  side  with  this  extension  of  the  principle  of  ability 
to  pay,  went  its  enlargement  in  another  direction.  Under 
the  inheritance  tax  the  large  amounts  have  to  pay  increased 
rates;  in  the  income  tax,  where  this  was  deemed  imprac- 
ticable, a  somewhat  similar  result  was  reached  by  mak- 
ing the  smaller  amounts  pay  decreased  rates.  As  a  result 
of  successive  changes,  the  tax  had  been  so  arranged  that 
incomes  below  .£150  were  entirely  exempt,  while  incomes 
between  £150  and  £400  received  an  abatement  of  £120. 
Under  the  new  law  the  desire  to  ease  the  burdens  on  the  lower 
classes  has  resulted  not  only  in  an  increase  of  the  total 
exemption,  but  in  an  addition  to  the  abatements  and  in 
an  enlargement  of  the  classes  to  which  abatement  is  accorded. 
The  limit  of  total  exemption  is  now  fixed  at  £160 ;  incomes 
between  £160  and  £400  receive  an  abatement  of  £160; 
while  incomes  between  £400  and  £500  are  permitted  to 
deduct  £100.  To  use  technical  language,  while  the  pro- 
gressive principle  is  introduced  in  the  inheritance  tax,  the 
degressive  principle  is  extended  in  the  income  tax.  Both 
are  manifestations  of  the  idea  of  graduation,  according  to 
the  doctrine  of  faculty  in  taxation. 

One  other  change  deserves  mention.  The  landowners 
made  a  strenuous  opposition  to  the  equalization  of  the 
"death  duties,"  maintaining  that  real  estate  already  paid 
more  than  its  share  in  the  shape  of  local  rates.  To  this 
objection  two  arguments  were  opposed.  In  the  first  place 
it  was  by  no  means  proved  that  the  weight  of  the  local 
taxes  rests  on  the  landowners.  Not  only  are  the  taxes 
levied  on  the  occupier,  so  that  the  incidence  is  only  partly, 
if  at  all,  on  the  owner ;  but  the  landowner  is  largely 
exempt  from  what  are  known  in  America  as  special  assess- 
ments. Secondly,  it  was  contended  that  there  would  be 

1  The  fear  that  the  new  tax  portends  a  breaking  up  of  the  large  landed 
estates  seems  to  be  groundless.  The  lawyers  are  already  devising  schemes  of 
settlement  which  will,  in  part  at  least,  nullify  the  law. 


RECENT  REFORMS  IN  TAXATION  313 

a  better  prospect  of  securing  an  equitable  system  of  taxation 
if  each  tax  were  made  just  in  itself,  without  regard  to  the 
others.  Yet  attention  was  so  far  paid  to  the  cry  raised 
by  the  landowners  as  to  lead  the  government  to  diminish 
the  burden  of  the  income  tax  resting  on  them.  It  had 
long  been  a  complaint  that  real  estate  was  assessed  in 
schedule  A  at  its  gross  income,  not  at  its  net  income,  thus 
not  permitting  deductions  for  repairs.  Under  the  new  act 
the  assessment  may  be  reduced  by  one-eighth  in  the  case 
of  farms,  and  by  one-sixth  in  the  case  of  other  buildings. 
This  is  at  once  a  substantial  concession  to  the  landowners, 
and  a  decided  improvement  in  the  theory  of  the  tax  itself. 
But  the  change  in  schedule  A  and  the  great  extension  of  the 
exemption  and  abatements  promised  so  materially  to  diminish 
the  yield  that  it  was  deemed  necessary  to  increase  the  rate 
from  sevenpence  in  the  pound,  or  less  than  three  per  cent, 
at  which  it  had  stood  some  time,  to  eightpence,  or  three  and 
one-third  per  cent. 

Finally,  attention  must  be  called  to  the  provisions  affecting 
the  relation  between  local  and  national  revenues.  For  some 
time  there  has  been  growing  dissatisfaction  with  the  sys- 
tem of  local  taxation.  During  the  eighties  an  attempt  was 
made  to  remove  this  in  part  by  the  device  of  grants-in-aid, 
or  subsidies  from  the  general  government  to  the  local  bodies. 
In  1888,  Mr.  Goschen  altered  the  arrangement  by  allotting 
to  the  local  bodies  a  certain  percentage  of  the  probate  duty. 
The  new  law  virtually  maintains  this  arrangement  by  appro- 
priating out  of  the  new  estate  duty  to  the  reduction  of  local 
taxation  a  sum  of  one  and  one-half  per  cent  on  the  net  value 
of  the  property  .which,  but  for  the  substitution  of  estate 
duty,  would  have  been  chargeable  with  probate  duty.  Sir 
William  Harcourt  -made  no  attempt,  however,  to  reconsider 
the  whole  question  of  the  relation  between  general  and  local 
taxes,  but  expressly  left  it  open  for  future  discussion. 
Further  consideration  of  this  point  —  perhaps  the  only  im- 
portant point  in  which  the  English  system  is  still  defective 
—  cannot  much  longer  be  delayed. 


314  ESSAYS  IN  TAXATION 

It  may  be  interesting  to  note  the  probable  financial  results 
of  these  measures.  While  the  income  tax  at  the  old  figures 
was  estimated  to  produce  ,£15,200,000,  the  increase  of  rate 
is  almost  counterbalanced  by  the  changes  above  alluded  to. 
On  the  other  hand,  whereas  the  "death  duties"  have  been 
yielding  about  £10,000,000,  the  new  system  is  expected  to 
increase  the  yield  to  £13,500,000;  but  as  £2,500,000  will 
go  to  the  reduction  of  local  taxation,  the  net  increase  to  the 
imperial  treasury,  especially  in  the  first  year,  will  be  only 
about  one  million.  The  new  measures,  therefore,  are  in- 
tended not  so  much  to  produce  more  revenue  as  to  introduce 
more  justice  and  to  equalize  the  burdens  on  the  various 
classes  of  taxpayers. 

The  new  budget  thus  marks  a  turning-point  in  English 
finance,  and  has  already  proved  itself  very  popular.1  To  have 
swept  away  the  anomalies  of  a  great  system  of  taxation,  to 
have  definitely  introduced  the  principle  of  progression,  to 
have  removed  inequalities  in  the  income  tax,  and  to  have 
greatly  increased  the  minimum  of  exemption,  —  these  are 
achievements  on  which  any  finance  minister  might  pride  him- 
self. The  name  of  Sir  William  Harcourt,  it  may  safely  be 
affirmed,  will  hereafter  be  indissolubly  linked  in  the  annals 
of  British  finance  with  those  of  Peel  and  Gladstone. 

II.    New  Zealand. 

While  England  was  battling  with  these  problems,  a  similar 
movement  was  going  on  at  the  antipodes.  ,  In  New  Zealand, 
as  in  all  early  communities,  the  original  source  of  revenue 
was  the  general  property  tax.  But  this,  having  obviously 
become  unsuitable  to  modern  conditions,  has  been  modified 
in  several  directions.  The  three  recent  important  changes 
are  the  enactment  of  the  income  tax,  the  adoption  of  the  sys- 
tem of  graduation,  and  the  exemption  of  improvements  from 
the  land  tax. 

1  The  issues  in  the  electoral  campaign  of  1895  did  not  turn  on  the  budget. 
Both  parties  are  committed  to  the  income  tax,  to  the  "  death  duties,"  to  the 
principle  of  graduation,  and  to  the  reform  of  local  taxation. 


RECENT  REFORMS  IN  TAXATION  315 

The  first  step  in  the  movement  was  the  passage  of  "  The 
Land  and  Income  Assessment "  act  of  1891,1  which  replaced 
the  previous  "  Property  Assessment "  act.  The  income  tax 
and  the  land  tax  were  really  distinct  measures,  although 
they  were  generally  coupled  together,  and  were  dealt  with 
in  various  sections  of  the  same  act;  but,  although  dis- 
tinct, they  were  complementary.  In  framing  a  scheme  of 
income  taxation,  three  possible  methods  may  be  followed. 
We  may  attempt  to  reach  the  income  as  a  whole,  from  all 
sources,  and  have  a  general  income  tax  ;  or  we  may  separate 
the  sources  of  income  and  levy  a  distinct  tax  on  each,  as 
on  land  incomes,  on  business  incomes,  on  professional 
incomes,  and  so  forth  ;  or,  thirdly,  since  the  yield  of  land 
everywhere  forms  so  important  a  share  of  national  income, 
we  may  split  the  tax  into  only  two  parts,  one  of  which 
endeavors  to  hit  the  income  from  land,  while  the  second  is 
intended  to  reach  all  the  other  forms  of  income.  Since  the 
selling  value  of  real  estate,  in  modern  communities  where 
land  is  continually  bought  and  sold,  is  approximately  the 
capitalized  value  of  the  income,  it  makes  little  difference 
whether  we  assess  the  land  on  its  income  value  or  on  its 
property  value.  New  Zealand,  following  the  example  of  some 
of  the  Swiss  commonwealths,  adopted  this  third  method ; 
that  is,  New  Zealand  endeavored  substantially  to  reach  the 
entire  income  by  levying  a  land  tax  on  the  capitalized  income 
from  land,  and  by  assessing  the  income  from  all  other  sources 
through  the  so-called  income  tax.2 

The  income  tax  is  levied  on  corporations  (or  "  companies  ") 
and  individuals.  The  former  are  taxed  on  their  net  income, 
but  the  security  holders  are  then  exempt.  In  most  cases 

1  An  act  to  regulate  *he  assessment  of  land  and  income  for  the  purposes 
of  taxation.     Sept.  8,  1891. 

2  The  colony  of  Victoria  has  very  recently  followed  the  other  principle  in 
levying  a  general  income  tax.     By  "  the  Act  to  impose  a  Tax  on  Incomes," 
Jan.  29,  1895,  incomes  below  £200  are  free  ;  on  incomes  from  personal  exer- 
tion, the  rate  is  fourpence  per  pound  up  to  £1200,  sixpence  per  pound  up  to 
£2200,  and  eightpence  per  pound  on  larger  amounts ;  on  incomes  from  the 
produce  of  property  within  Victoria  the  rates  are  exactly  double. 


316  ESSAYS  IN  TAXATION 

profits  from  mortgages  are  not  included  in  income,  because 
mortgages  are  treated  as  interests  in  land  and  are  accord- 
ingly subject  to  the  land  tax.1 

Individuals  are  assessed  on  their  income  derived  either 
from  business,  or  from  employments  or  emoluments.  This 
last  category  is  very  broad,  including  profits  from  "the 
exercise  of  any  profession,  employment,  or  vocation  of  any 
kind,  or  from  any  salary,  wages,  allowances,  pension,  stipend, 
or  charge  or  annuity  of  any  kind  not  charged  on  land." 
In  order  to  prevent  double  taxation,  however,  it  is  provided 
that  when  any  business  or  other  income  is  derived  from  land, 
a  sum  equal  to  five  per  cent  on  the  value  of  the  land  assess- 
ment may  be  deducted  from  the  taxable  income.  Not  only 
private  corporations,  but  all  local  authorities  and  individ- 
ual employers,  are  required  to  furnish  full  lists  and  salaries 
of  persons  employed  by  them.  The  income  tax  is  paya- 
ble only  on  the  excess  over  .£300,  and  certain  minor  deduc- 
tions are  allowed.  The  rate  is  fixed  by  periodical  acts, 
according  to  the  needs  of  the  colony ;  in  1893 2  it  was 
fixed  at  a  shilling  in  the  pound,  or  five  per  cent.  In 
the  case  of  private  individuals,  incomes  from  £300  to 
£1000  are  charged  two  and  one-half  per  cent,  while  the  full 
rate  is  assessed  only  on  the  excess  above  £1000  ;  in  the 
case  of  corporations  the  rate  is  uniformly  five  per  cent.  The 
£300  exemption  is  accorded  only  to  persons  domiciled  or 
permanently  resident  in  the  colony. 

The  second  half  of  the  general  scheme  of  taxation  is  the 
land  tax.  An  important  and  valuable  feature  of  the  law 
is  the  treatment  of  mortgages,  which  are  regarded  for  the 
purposes  of  taxation  as  real  estate.  The  landowner  is  taxed 
on  the  value  of  the  land,  less  the  amount  of  the  mortgage 
which  is  required  to  be  registered;  and  the  mortgagee  is 
taxed  on  the  value  of  the  mortgage.  Land  under  £500  in 

1  But  under  a  recent  amendment,  banking,  loan,  building  and  investment 
companies  must  include  in  their  return  of  income  the  income  from  mortgages, 
and  are  liable  for  income  tax,  not  for  land  tax.      Cf.  the  Land  and  Income 
Assessment  Act  Amendment  Act,  Oct.  2,  1893. 

2  An  Act  to  impose  a  Land  Tax  and  an  Income  Tax,  Oct.  6,  1893. 


RECENT  REFORMS  IN  TAXATION  317 

value  is  exempt,  and  accordingly  the  exemption  is  accorded 
to  mortgages  of  the  same  amount.  The  mortgage,  however, 
is  assessed  to  the  mortgagee  at  its  actual  value  —  a  provision 
of  importance  when  the  value  of  the  security  does  not  equal 
the  mortgage  debt.  The  result  is  that  the  government  gets 
its  tax  on  the  whole  value  of  the  land,  that  there  is  no  double 
taxation  on  the  mortgagor,  and  that  the  mortgagee  or  owner 
of  personal  property  loaned  on  the  land  must  bear  his  due 
share  of  taxation.  The  law  does  not  attempt  to  consider  the 
ultimate  incidence  of  the  tax  ;  but  so  far  as  it  goes,  it  is 
constructed  on  scientific  principles.  The  provisions  apply, 
as  pointed  out  above,  to  corporations  as  well  as  to  individ- 
uals, with  the  exception  of  banking  and  loan  associations. 

An  interesting  section  is  that  dealing  with  the  tax  on 
improvements,  which  are  defined  to  include  "houses  and 
buildings,  fencing,  planting,  draining  of  land,  clearing  from 
timber,  scrub,  or  fern,  laying  down  in  grass  or  pasture,  and 
any  other  improvements  whatsoever,  the  benefit  of  which  is 
unexhausted  at  the  time  of  valuation."  In  the  original  law 
such  improvements  were  exempted  up  to  the  value  of  X3000; 
but  under  the  amendment  of  1893  the  exemption  is  extended 
to  the  value  of  all  improvements,  of  whatever  amount,  the 
tax  now  being  levied  only  on  the  bare  value  of  the  land. 
The  significance  of  this  change  will  be  estimated  in  a  moment. 

The  most  important  feature  of  the  new  legislation  is  the 
adoption  of  the  progressive  system.  The  Australasian  colo- 
nies have  been  growing  restless  under  the  gradual  aggrega- 
tion of  land  into  the  hands  of  a  few  proprietors,  and  some  of 
them  have  attempted  to  check  the  process  by  a  system  of  pro- 
gressive inheritance  taxes,  like  that  just  introduced  into  Eng- 
land. In  New  Zealand,  however,  where  most  of  the  large 
fortunes  have  hitherto  been  due  to  dealings  in  land,  it  was 
thought  that  the  same  result  might  be  reached  by  a  progres- 
sive tax  on  living  landholders,  instead  of  on  the  estates  of 
deceased  property  owners.  Accordingly  in  1891,  a  gradu- 
ated tax  was  imposed  in  addition  to  the  ordinary  land  tax. 
The  latter  was  fixed  at  one  penny  in  the  pound,  while  the 


318 


ESSAYS  IN  TAXATION 


additional  graduated  tax  began  at  an  eighth  of  a  penny  and 
rose  to  a  penny  and  six  eighths.  In  1893,  however,  the  rate 
of  progression  was  still  further  increased,  in  order  to  obviate 
any  diminution  of  revenue  which  might  result  from  the  com- 
plete exemption  of  all  improvements.  Accordingly,  at  pres- 
ent the  additional  tax  varies  from  one  eighth  of  a  penny  to 
twopence  in  the  pound,  with  the  result  that  the  largest 
estates  now  pay  a  total  land  tax  of  threepence  in  the 
pound.1  But  the  tax  is  even  larger  than  would  appear  from 
these  figures,  because  of  the  provision  that  in  the  case 
of  the  graduated  tax  the  value  of  the  mortgage  cannot 
be  deducted  from  the  value  of  the  land.  Deduction  is  per- 
mitted only  in  the  ordinary  land  tax,  or  in  the  case  of 
estates  under  X5000  in  value.  On  the  other  hand,  the 
mortgage  itself  is  never  liable  to  the  graduated  tax.  We 
thus  have  for  the  first  time  in  any  English-speaking  country 
a  graduated  scale  in  a  direct  property  tax.  England  and 
her  colonies  lead  the  way  not  only  in  progressive  inheritance 
taxes,  but  also  in  progressive  property  taxes.  The  drift  is 
unmistakable. 

It  might  be  thought  by  some  that  the  adoption  of  this 
progressive  land  tax  implies  a  process  of  confiscation  by  the 
government.  In  order  to  preclude  all  possibility  of  such  an 
interpretation,  the  New  Zealand  law  has  inserted  an  ingen- 


£10,000  one-eighth  of  a  penny. 

15,000  two-eighths  of  a  penny. 

20,000  three-eighths  of  a  penny. 

25,000  four-eighths  of  a  penny. 

30,000  five-eighths  of  a  penny. 

40,000  six-eighths  of  a  penny. 

50,000  seven-eighths  of  a  penny. 

70,000  one  penny. 

90,000  one  penny  and  one-eighth. 
110,000  one  penny  and  two-eighths. 
130,000  one  penny  and  three-eighths. 
150,000  one  penny  and  four-eighths. 
170,000  one  penny  and  five-eighths. 
190,000  one  penny  and  six-eighths. 
210,000  one  penny  and  seven-eighths, 
lum         two  pence. 


1  The  scale  as  amended  is  as  follows  :  — 

When  the  value  is      £5,000  and  less  than 

" 

' 

10,000 

" 

i 

15,000 

M 

« 

20,000 

« 

• 

25,000 
30,000 

« 

< 

40,000 

50,000 

« 

1 

70,000 

II 

< 

90,000 

M 

1 

110,000 

« 

i 

130,000 

M 

i 

150,000 

i 

n       a 

170,000 

t 

<t      i<      « 

190,000 

' 

M                l(               41 

9,10  OflO  nr  pYpppHs  that 

RECENT  REFORMS  IN  TAXATION  319 

ions  clause,  which  reminds  us  in  some  respects  of  the  ai/rt'Soo-t? 
in  ancient  Athens.  If  a  man  thought  that  he  had  been  as- 
sessed too  high  for  the  extraordinary  property  tax  or  liturgy, 
as  compared  with  a  neighbor  who  had  been  passed  over,  he 
could  call  upon  the  latter  to  assume  the  tax;  and  in  case  of 
the  neighbor's  refusal,  he  could  demand  an  "exchange  of  prop- 
erty," out  of  the  proceeds  of  which  the  tax  was  defrayed.  In 
New  Zealand  the  government  takes  the  place  of  the  third 
party.  In  other  words,  if  a  taxpayer  thinks  that  he  is  assessed 
too  high,  he  can  call  upon  the  government  to  purchase  his  land 
at  his  own  original  valuation ;  he  has  the  alternative  to  pay 
the  tax  at  the  official  valuation  or  to  sell  the  land  at  his  own 
valuation.  It  is  readily  seen  that  in  this  way  no  property 
can  be  confiscated.  On  the  other  hand,  the  government  in 
its  turn  may  purchase  the  land  at  the  assessed  valuation 
plus  ten  per  cent  additional,  in  case  the  owner  will  not  con- 
sent to  the  official  valuation.  As  a  matter  of  fact,  advan- 
tage has  already  been  taken  of  the  provision  in  the  case  of 
the  so-called  Cheviot  estate,  of  over  84,000  acres,  which  was 
returned  by  the  owners  in  1892  at  £260,220,  but  which  was 
assessed  by  the  government  at  £304,826.  The  government 
refused  to  reduce  the  assessment,  and  the  owners  called  on 
the  government  to  purchase  the  property.  This  was  done  in 
1893,  and  the  government  is  now  proceeding  to  carve  it  up 
into  small  plots  and  gradually  to  dispose  of  it.  The  colonial 
treasurer  states  that  the  revenue  will  give  a  handsome  return 
on  the  purchase  money.1 

It  remains  to  estimate  the  meaning  of  the  exemption  of  im- 
provements. The  American  newspapers  have  been  filled  with 
accounts  of  the  introduction  of  the  single  tax  in  New  Zealand, 
and  the  enthusiastic  followers  of  Henry  George  have  been  jubi- 
lant. But  when  'the  law  and  the  official  reports  are  carefully 
scrutinized,  the  enthusiasm  seems  to  be  somewhat  misplaced. 

There  can  indeed  be  little  doubt  that  Mr.  George's  views 
exerted  some  influence  in  the  enactment  of  the  law  ;  but  it 

1  Financial  Statement  in  Committee  of  Supply  by  the  Colonial  Treasurer, 
1893,  p.  19,  Wellington,  1893. 


320  ESSAYS  ftf  TAXATION" 

must  be  remembered  that  the  provisions  of  the  law  may  be 
explained  without  any  reference  to  those  particular  views. 
In  young  and  rapidly  growing  communities,  concessions  are 
frequently  made  which  would  be  out  of  place  amid  more 
settled  industrial  conditions.  Thus  the  social  effects  of  tax- 
ation or  of  the  remission  of  taxation  are  clearly  recognized 
in  the  laws  of  some  American  states,  which  exempt  from 
assessment  for  a  limited  period  new  industrial  enterprises, 
timber  lands  and  various  kinds  of  improvements  on  land. 
There  is  in  such  cases  no  implication  that  the  owners  of 
these  establishments  or  forests  or  improvements  are  free 
from  fiscal  obligations  toward  the  state  ;  for  to  the  extent 
that  they  have  property  or  income,  they  also  are  ultimately 
liable.  But  it  is  deemed  so  desirable  to  foster  these  new 
forms  of  enterprise  that  the  community  as  a  whole  is  willing 
to  bear  the  additional  temporary  burden  in  order  to  realize 
more  permanent  benefits.  The  government  of  New  Zealand 
stated  at  the  tune  the  bill  was  introduced  that  their  object 
was  to  induce  large  landowners  to  improve  their  lands, 
and  thus  to  bring  about  an  increased  national  production.1 
Looked  at  from  this  point  of  view,  there  is  much  to  be  said  for 
the  provision,  which,  however,  does  not  mean  that  the  small 
farmer  will  be  as  much  benefited  as  some  might  imagine. 
The  latest  official  assessments  show  that,  whereas  in  the 
country  districts  or  counties  the  unimproved  value  of  the 
lands  exceeds  the  value  of  the  improvements,  the  reverse  is 
true  in  the  towns  or  boroughs.  The  figures  for  1893  are  as 
follows : 2  — 

VALUE  OF  UNIMPROVED 

ACTUAL  VALUE.  IMPBOVEMENTS.  VALUE. 

Counties £85,818,167  £27,922,735  £57,880,233 

Boroughs 36,406,862  18,442,562  17,907,662 

Totals     ....  £122,225,029  £46,365,297  £75,787,895 

1  "  It  will  be  admitted  that  the  repeal  of  the  tax  on  improvements  should 
have  the  effect  of  encouraging  the  owners  of  large  properties  to  expend  money 
in  improving  their  land,  and  thereby  add  to  its  productiveness.     This  would 
be  a  direct  advantage  to  the  colony  as  a  whole,  both  by  causing  an  expendi- 
ture on  labor,  and  by  adding  to  the  products."  —  Financial  Statement  in 
Committee  of  Supply,  1893,  p.  18. 

2  New  Zealand  Official  Year  Book,  1893,  by  E.  J.  von  Dadelszen,  p.  429. 


RECENT  REFORMS  IN  TAXATION  321 

That  is  to  say,  in  the  boroughs  the  improvements  are 
worth  actually  more  than  the  bare  land,  while  in  the  country 
districts  the  land  is  worth  more  than  twice  as  much  as  the 
improvements. 

The  claim  of  Mr.  George  that  the  small  farmer  will  bene- 
fit at  the  expense  of  the  city  lot-owner  is  therefore  disproved 
in  New  Zealand  as  it  has  been  in  other  parts  of  the  world.1 
The  figures  show  that  it  was  not  so  much  the  object  of  the 
law  to  discourage  the  urban  landowner  as  to  reach  the  large 
rural  proprietors.  As  between  the  small  farmer  and  the 
city  landowner,  the  law  is  distinctly  unfavorable  to  the 
former,  for  the  exemption  of  improvements  removes  over 
one-half  of  the  townsman's  tax,  but  less  than  one-third  of 
the  farmer's  tax  ;  that  is,  it  relatively  increases  the  tax  of  the 
farmer.  Were  the  land  to  be  owned  by  small  farmers,  the 
system  would  be  unendurable  ;  but  it  is  precisely  because 
the  land  is  not  owned  by  small  farmers  that  the  law  was  en- 
acted. The  exemption  of  improvements  was  a  corollary  of 
the  graduated  tax  on  land.  When  any  part  of  the  improve- 
ments was  exempt,  the  tax  was  graduated  ;  and  when  the 
exemption  was  made  complete,  the  scale  of  graduation  was 
increased. 

The  claim  that  the  new  law  means  the  introduction  of  the 
single  tax  is  still  further  weakened  by  the  fact  that  it 
went  hand  in  hand  with  the  extension  of  the  income  tax  on 
other  sources  than  on  land.  Finally,  the  contention  that 
there  is  any  single  tax  at  all  in  New  Zealand  is  rendered 
absurd  by  the  fact  that  in  1894  the  revenues  from  the  land 
amounted  to  X  285,000  out  of  a  total  revenue  of  over  four 
and  a  quarter  millions,  the  larger  part  of  which  was  derived 
from  indirect  taxes.  In  other  words,  the  "  single"  tax  yields 
about  six  and  a  half  per  cent  of  the  colonial  revenues,  and 
of  course,  when  we  take  into  account  the  local  revenues, 
composed  chiefly  of  the  general  property  tax,  a  much  smaller 
proportion  of  the  total  income.  The  reader  is  thus  in  a 
position  to  judge  how  much  foundation  there  is  for  the  state- 
i  Supra,  pp.  86-90. 


322  ESSAYS  IN  TAXATION 

ment  that  the  recent  prosperity  of  New  Zealand  is  to  be 
ascribed  to  the  "  single  "  tax.  The  real  intent  of  the  new 
legislation  is  to  make  the  large  property  owners  pay  more 
than  they  have  hitherto  been  paying,  and  to  subject  to  taxa- 
tion other  classes  that  have  hitherto  been  exempt.1  It  is 
thus  an  attempt  to  realize  the  principle  of  faculty  in  taxation. 

III.  Holland. 

In  the  review  of  the  tax  reforms  in  England  and  New 
Zealand  we  have  seen  that  the  changes  were  largely  the  out- 
growth of  popular  agitation;  in  the  states  now  to  be  dis- 
cussed the  reforms  were  more  directly  the  result  of  scientific 
discussion.  This  is  especially  true  of  the  Netherlands,  where 
all  the  recent  tax  laws  are  due  to  N.  G.  Pierson,  the  author 
of  the  ablest  Dutch  treatise  on  economics  and  finance.  Mr. 
Pierson  was  at  one  time  a  university  professor,  and  was  for 
many  years  the  president  of  the  Bank  of  the  Netherlands. 
For  several  decades  he  had  been  devoting  himself  to  the 
consideration  of  fiscal  problems,  and  when  in  1891  he  was 
made  Minister  of  Finance,  he  immediately  set  about  the 
task  of  bringing  the  tax  system  more  into  accord  with 
the  demands  of  modern  theory.  In  his  budget  for  1892 
he  sounded  the  keynote  of  the  new  programme  —  a  more 
equitable  distribution  of  the  burden  of  taxation  —  claiming 
that  the  poorer  classes  were  taxed  too  much,  and  the 
wealthy  too  little.  The  problem  was,  how  to  bring  about 
an  equilibrium. 

The  Dutch  revenue  system  was  composed  in  large  part  of 
indirect  taxes.  Import  duties,  it  is  true,  were  very  light, 
but  the  internal  revenue  or  excise  taxes  were  still  burden- 
some. The  direct  taxes  comprised,  as  in  France  and  some 
other  countries,  a  land  tax,  a  business  tax,  and  a  "  personal 
tax  "  calculated  according  to  house  rent.  The  business  tax 

1  "  The  end  sought  to  be  attained  by  the  whole  scheme  is  to  compel  contri- 
bution to  the  requirements  of  the  state  according  to  the  ability  of  those  who 
are  called  upon  to  contribute  thereto."  "Statement  by  the  Commissioner 
of  Taxes  in  New  Zealand,"  N.  Z.  Official  Tear  Book  for  1894,  p.  44. 


RECENT  REFORMS  IN  TAXATION  323 

had  grown  to  be  very  unequal,  being  based  on  rough  out- 
ward signs;  and  the  personal  tax,  which  took  the  same 
proportion  from  large  and  small  rentals,  proved  to  be  a 
serious  drain  on  the  poorer  classes.  Whole  sections  of  the 
population,  moreover,  were  virtually  exempt.  Mr.  Pierson 
therefore  proposed  a  fourfold  reform  :  — 

(1)  The  abolition  or  decrease  of  the  more  vexatious  excise 
duties;  (2)  the  enlargement  of  the  business  tax  into  a  gen- 
eral income  tax;  (3)  the  reconstruction  of  the  personal  tax 
through  the  introduction  of  a  progressive  scale  and  through 
other  changes;  (4)  a  reform  of  local  taxation  so  that  the  local 
and  general  taxes  together  might  form  a  harmonious  whole. 
Of  these  reforms  only  the  first  two  were  accomplished,  when 
the  ministry  was  overthrown  on  an  entirely  different  point. 
Yet  even  these  partial  reforms  represent  a  distinct  step  in 
advance  and  deserve  our  attention.1 

The  first  step  was  the  reduction  in  the  excise  duties. 
In  1892  the  excise  on  soap  was  abolished,  and  that  on  salt 
was  reduced  from  nine  to  three  florins  per  hundred  kilo- 
grammes. The  vexatious  registration  duty  on  the  transfer 
of  land  was  lowered  from  6.27  to  2.15  per  cent,  or  in  the 
case  of  a  second  transfer  within  the  same  year  from  1.09  to 
0.40  per  cent.  With  the  exception  of  a  minor  tax  on  meat, 
there  were  then  left  only  the  duties  on  spirits  and  on  sugar, 
which  were  retained  as  in  other  countries  as  essential  features 
of  every  tax  system.  This  reform  in  itself  proved  to  be  a 
distinct  relief  to  the  poorer  classes. 

Of  more  importance  were  the  changes  made  in  the  direct 
taxes.  The  business  tax,  akin  to  the  French  patentee,  had  be- 
come in  many  ways  inadequate  and  unjust,  and  was  now  to 
be  replaced  by  a  tax  on  the  actual,  rather  than  on  the  assumed 
income  and  was  furthermore  to  be  extended  so  as  to  reach  in- 
come from  other  sources  than  from  business.  Pierson  deemed  it 

1  The  best  account  of  the  recent  changes,  of  the  discussion  in  Parliament 
and  of  the  previous  attempts  at  tax  reform,  will  be  found  in  an  elaborate 
article  by  G.  M.  Boissevain,  "  Die  neueste  Steuerreform  in  den  Nieder- 
landen,"  in  Finanz-Archiv,  vol.  xi.,pp.  419-746.  This  also  contains  the  text 
of  the  laws  themselves. 


324  ESSAYS  IN  TAXATION 

wise  to  separate  this  tax  into  two  parts,  one  of  which  should 
apply  to  the  income  from  property  alone,  while  the  other  should 
include  all  other  incomes.  In  the  first  case,  however,  it  was 
thought  best  to  make  the  tax  in  large  part  one  on  the  property 
itself,  rather  than  on  the  income  from  property.  The  earlier 
law  thus  provided  for  what  is  termed  the  property  tax.1 

The  question  that  immediately  presents  itself  is :  Why 
should  there  be  a  separate  property  tax  ?  The  answer  is : 
Largely  for  administrative  purposes.  The  administration 
of  the  tax  would  thereby  be  put  into  the  hands  of  officials 
already  familiar  with  the  land  and  inheritance  taxes,  while 
the  income  tax  would  naturally  fall  to  the  officials  acquainted 
with  the  business  tax  ;  secondly,  the  local  authorities  might 
desire  to  add  a  percentage  to  the  property  tax  rather  than  to 
the  income  tax  ;  thirdly,  it  would  be  the  most  convenient 
method  of  providing  for  a  different  or  higher  taxation  of 
income  derived  from  property  than  of  income  derived  from 
labor.  In  addition  to  these  points  the  rather  doubtful  argu- 
ment was  advanced  that  the  same  amount  of  capital  affords 
different  rates  of  income  according  to  the  varying  security 
of  the  principal,  and  that  the  poor  man  who  cannot  afford 
to  make  much  of  a  choice  generally  prefers  securities  with 
higher  rates  of  interest ;  to  tax  income  instead  of  capital 
would  thus  be  to  favor  the  rich  man.  Finally,  in  answer  to 
the  objection  that  a  non-dividend-yielding  security  would  also 
be  taxed,  it  was  urged  that  this  could  not  be  avoided  even 
under  an  income  tax ;  for  if  the  capital  value  of  a  security 
should  fall  in  any  one  year  more  than  the  amount  of  the 
interest  or  of  the  ordinary  dividend,  the  income  tax  would 
be  paid  not  from  income,  but  from  capital. 

Dubious  as  some  of  these  reasons  were,  they  found  favor 
with  Parliament.  Even  in  the  property  tax,  however,  the 
principle  of  income  was  not  wholly  abandoned ;  for  in  the  case 
of  real  estate  the  capital  value  is  fixed  at  twenty  times  the 
annual  revenue,  unless  the  owner  elects  to  be  assessed  ac- 
cording to  selling  value.  It  may  be  said  in  passing  that  the 
1  Act  of  Sept.  27,  1892. 


RECENT  REFORMS  IN  TAXATION  325 

property  tax  applies  only  to  individuals,  not  to  corporations ; 
and  that  furniture,  objects  of  art,  scientific  apparatus,  life 
insurance  policies  and  a  few  other  categories1  are  not  included 
in  taxable  property. 

A  point  of  considerable  importance  is  that  the  old  land  tax 
is  levied  in  addition  to  the  property  tax.  The  landowners 
had  for  many  years  blocked  the  way  to  any  change  in  the 
system  by  asserting  that  to  tax  their  land  by  the  land  tax 
and  again  by  the  property  tax  would  involve  gross  double 
taxation.  Mr.  Pierson,  however,  had  long  ago  espoused  the 
capitalization  theory  of  the  land  tax,  and  had  maintained  that 
an  exclusive  tax  on  land  becomes  a  kind  of  rent-charge,  de- 
pressing the  selling  value  of  the  land  by  a  sum  equal  to  the 
capitalization  of  the  tax.  The  new  purchaser,  he  argued, 
makes  an  allowance  for  the  tax  in  the  purchase  price,  and  buys 
to  that  extent  an  exemption  from  future  taxation.  Since, 
therefore,  all  other  owners  of  property  were  to  be  taxed 
for  the  first  time,  it  would  be  unjust  to  exempt  the  land- 
owners from  the  property  tax.  The  land  tax  is  a  rent- 
charge  ;  the  property  tax  is  a  real  tax.  The  situation  was 
deemed  to  be  the  same  as  in  England,  where  the  land  tax 
exists  side  by  side  with  the  income  tax  on  land. 

Were  this  chapter  anything  more  than  a  bare  summary 
of  recent  legislation,  it  might  be  shown  that  there  was  a 
partial  fallacy  in  Mr.  Pierson's  reasoning.  For  the  theory  of 
amortization,  as  it  is  called,  holds  good  only  on  the  assump- 
tion that  the  land  tax  is  exclusive  ; 2  yet,  as  a  matter  of 
fact,  even  under  the  old  Dutch  system,  there  was  also  a  tax 
on  business  or  business  property.  Be  that  as  it  may,  Mr. 
Pierson's  argument  prevailed ;  but  several  concessions  were 
made  to  the  landed  interest.  The  rate  of  the  land  tax  was 
reduced  from  seven  to  six  per  cent ;  the  transfer  duties  on 

1  Such  as  articles  of  food  ;  the  right  to  pensions  or  annuities  ;  property  of 
which  the  usufruct  is  enjoyed  by  some  one  else ;  debts,  wages  and  other 
income  which  is  yet  due. 

2  For  a  fuller  statement  of  the  amortization  theory,  including  a  reference 
to  Pierson's  earlier  scientific  views,  see  my  work  On  the  Shifting  and  Inci- 
dence of  Taxation,  pp.  62-62. 


326  ESSAYS  IN  TAXATION" 

land  were  abolished  ;  the  official  assessment  of  land  for  the 
property  tax  was  purposely  kept  somewhat  below  the  actual 
value ;  and  land  used  for  agriculture,  by  a  legal  fiction  to  be 
stated  in  a  moment,  was  exempted  from  the  income  tax.  In 
these  several  ways  it  was  sought  to  remove  the  imputation  of 
double  taxation.  It  may  be  questioned,  however,  whether 
this  object  was  entirely  attained. 

The  fundamental  feature  of  the  new  system  is  the  co-ordi- 
nation of  the  property  tax  with  a  complementary  income 
tax,  for  the  purpose  of  reaching  through  a  combination  of 
the  rates  the  entire  taxable  faculty  of  the  individual.  The 
official  name  of  the  income  tax  is  "tax  on  income  from  occu- 
pations and  other  incomes," J  although  it  is  generally  called 
the  business  tax.  The  tax  is  levied  on  all  "  gains  and  wages," 
which  are  defined  to  include  "the  amount  of  all  net  revenues 
from  business,  trade,  manual  labor,  occupation  or  enterprise 
from  temporary  work  or  activity  of  any  kind,  from  con- 
tractual or  non-contractual  profits,  whether  in  cash  or  in 
securities."  The  law  applies  to  corporations  as  well  as  to 
individuals,  while  the  property  tax  applies  only  to  individ- 
uals ;  but  if  the  corporation  pays  the  income  tax,  individual 
security  holders  are  exempted.  In  order  to  obviate  the 
double  taxation  which  would  result  from  taxing  busi- 
ness capital  through  the  property  tax  and  business  profits 
through  the  income  tax,  recourse  is  had  to  an  expedient  so 
familiar  in  Switzerland  and  also  practised  in  Massachusetts. 
The  property  tax  is  presumed  to  reach  an  income  of  four  per 
cent ;  hence  the  income  tax  is  payable  in  almost  all  cases 
only  on  the  surplus  profits  above  four  per  cent.  In  this  way 
the  property  and  the  income  taxes  together  are  deemed 
to  reach  the  whole  income.2  In  the  case  of  capital  invested 
in  land,  the  income  is  declared  to  be  legally  equivalent  to 
four  per  cent.  Agricultural  capital  is  hence  exempt  from 
the  income  tax,  as  it  had  previously  been  free  from  the 

1  Belasting  op  bedrijfs-  en  andere  inkomsten.    Act  of  Oct.  2,  1893. 

2  For  a  fuller  discussion  of  this  arrangement  from  the  standpoint  of  theory, 
see  supra,  p.  99  and  pp.  216-218. 


RECENT  REFORMS  IN  TAXATION  327 

business  tax,  although  the  land  is  liable  to  both  the  property 
and  the  land  tax. 

In  respect  of  the  rate  of  taxation  the  new  Dutch  laws 
recognize  the  principle  of  differentiation  as  well  as  of  pro- 
gression. To  differentiate  the  rate  by  taxing  incomes  from 
property  more  heavily  than  incomes  from  labor  was,  as  we 
know,  one  of  the  avowed  reasons  for  the  enactment  of  the 
two  separate  laws,  and  did  not  meet  with  much  opposition. 
But  when  the  project  of  graduating  the  tax  was  introduced, 
the  discussion,  as  in  all  such  cases,  grouped  itself  about  two 
main  points.  On  the  one  hand  the  partisans  of  a  strict  propor- 
tional rate  maintained  that  progression  means  socialism  and 
confiscation ;  on  the  other  hand  the  extremists  declared  their 
belief  in  the  socio-political  theory  of  taxation,  according  to 
which  progressive  taxation  should  be  utilized  as  an  engine 
to  remove  inequalities  in  fortune.  Pierson  took  the  middle 
ground,  declaring  his  opposition  to  both  these  theories  and 
maintaining  that  a  moderate  progression  was  a  logical  conclu- 
sion from  the  theory  of  faculty  in  taxation.  "  Progressive  taxa- 
tion," as  he  put  it,  "must  never  be  a  principle  (as  the  socialists 
would  have  it),  but  only  the  application  of  a  principle." 

The  practical  arrangement  was  as  follows  :  Property  under 
13,000  florins  is  entirely  exempt ;  from  13  to  14,000  the  tax  is 
fl.  2 ;  from  14  to  15,000  it  is  fl.  4.  If  the  property  exceeds 
fl.  15,000  but  is  less  than  fl.  200,000,  the  tax  is  1.25  per 
mill  for  the  surplus  over  fl.  10,000.  Property  of  fl.  200,000 
would  therefore  be  taxed  fl.  237£.  For  every  fl.  1000 
above  fl.  200,000  there  is  an  additional  tax  of  fl.  2.  In  other 
words,  there  is  a  deduction  in  all  cases  for  a  certain  part 
of  the  property  (fl.  10,000)  ;  there  is  a  complete  exemption 
for  a  minimum  of  subsistence  (fl.  13,000),  and  an  abatement 
for  a  somewhat  larger  amount  (fl.  15,000)  ;  and  finally  there 
is  a  slightly  progressive  rate.  For  if  income  on  property 
is  reckoned  as  four  per  cent,  the  property  tax  of  1.25 
per  mill  (on  sums  below  fl.  200,000)  equals  an  income  tax 
of  three  and  one-eighth  per  cent ;  while  a  property  tax  of 
two  per  mill  (on  sums  above  fl.  200,000)  equals  an  income 


328  ESSAYS  IN  TAXATION 

tax  of  five  per  cent.  Owing  to  the  deduction  of  fl.  10,000 
as  well  as  to  the  complete  exemption  of  fl.  13,000  and  the 
abatements  for  fl.  13,000  and  fl.  14,000,  the  property  tax 
computed  as  an  income  tax  would  vary  from  zero  to  almost 
five  per  cent.  This  will  be  seen  from  the  following  table  :  — 

PROPERTY. 
fl. 

12,000 

13,000 

14,000 

15,000 

20,000 

25,000 

50,000 

100,000 

150,000 

200,000 

210,000 

220,000 

250,000 

500,000 

1,000,000 

3,000,000 

5,000,000 

10,000,000 

20,000,000 

In  the  income  tax  it  was  proposed  to  observe  the  same 
principle  of  graduation,  but  the  rate  was  to  be  less.  Since 
fl.  200,000  is  equivalent  to  fl.  8000  income,  the  original  plan 
was  to  tax  incomes  from  labor  above  a  certain  minimum  two 
per  cent  up  to  fl.  8000,  and  three  and  one-fifth  per  cent  above 
that,  instead  of  the  three  and  one-eighth  per  cent  and  five 
per  cent  rates  of  the  property  tax.  That  is,  incomes  from 
labor  were  to  be  taxed  three-eighths  less  than  incomes  from 
property.  It  was  decided,  however,  to  make  the  minimum 
of  subsistence  higher  in  the  income  tax  than  in  the  property 
tax,  partly  because  of  the  existence  of  indirect  taxes,  partly 
for  other  reasons.  The  consequence  was  the  necessity  of 
two  schedules  in  the  income  tax,  one  for  incomes  from  labor 
alone,  and  one  for  taxpayers  already  subjected  to  the  prop- 
erty tax.  In  the  former  case  the  tax  is  levied  only  on  the 


TAX. 

AlIOtTNT 

PERCENTAGE 

fl. 

PER  MILL. 

OF  INCOME. 

0 

0 

0 

2 

0.15 

0.37 

4 

0.29 

0.72 

6.25 

0.41 

1.02 

12.50 

0.62 

1.55 

18.75 

0.75 

1.87 

50.00 

1.00 

2.50 

112.50 

1.12 

2.80 

176.00 

1.17 

2.92 

237.50 

1.19 

2.97 

257.50 

1.23 

3.07 

277.50 

1.26 

3.15 

337.50 

1.35 

3.37 

837.50 

1.67 

4.19 

1,837.50 

1.84 

4.59 

5,837.50 

1.96 

4.86 

9,837.60 

1.97 

4.92 

19,837.50 

1.98 

4.96 

39,837.50 

1.99 

4.98 

RECENT  REFORMS  IN"  TAXATION" 


329 


surplus  above  fl.  650  ;  but  as  the  property  tax  is  levied 
only  on  the  surplus  above  fl.  10,000  (which  corresponds  to 
an  income  of  fl.  400),  the  tax  on  incomes  from  property 
is  levied  on  the  surplus  above  fl.  250  (or  the  difference 
between  fl.  650  and  fl.  400).  The  higher  rate,  therefore, 
begins  in  this  case  not  with  fl.  8000  (as  in  the  case  of  labor 
incomes),  but  with  fl.  8200.  This  would  result  in  the  fol- 
lowing schedules,  which,  although  seemingly  complicated,  are 
the  results  of  simple  computations  :  — 


SCHEDULE  A. 

Incomes  from  Labor. 

Income.        Tax  (in  florins). 


SCHEDULE  B  (for  those  liable  also  to  the  Property  Tax). 
When  Property  amounts  to  When  Property  varies 

fl.  18,000  or  fl.  14,000.       between  fl.  15,000  and  fl.  200,000. 
Income.    Tax  (in  florins).        Income.          Tax  (in  florins). 


650  to    700        1 

250  to    300       2 

250  to   300       1.25 

700  «*    750       2 

300  "    350       2.75 

300  "    350       2 

750  "    800       2.75 

350  "    400       3.50 

350  "    400       2.76 

800  "    850       3.50 

400  "    450       4.25 

400  "    450       3.75 

850  "    900       4.25 

450  "    500       5 

450  "    500       4.26 

900  »    950       5 

500  "    550       5.75 

600  "    550       6 

950  "  1000       5.75 

550  "    600       6.50 

650  "    600       6.76 

1000  "  1050       6.50 

600  "    650       7.25 

600  «    650       6.60 

1050  "  1100       7.25 

660  "    700       8 

650  "    700       7.25 

1100  "  1150       8 

700  "    750       8.75 

700  "    760       8 

1150  "  1200       8.75 

750  "    800       9.50 

750  "    800       8.75 

1200  "  1250       9.50 

800  "    850     10.25 

800  "    850       9.50 

1250  "  1300      10.25 

860  "    900     11 

850  "    900     10.25 

1300  "  1350     11 

900  "    950     11.75 

900  "    950     11 

1350  "  1400     11.75 

950  "  1000     12.50 

950  "  1000     11.75 

1400  "  1450      12.50 

1000  "  1050     13.25 

1000  "  1050     12.60 

1450  "  1500      13.25 

1050  "  1150     14 

1050  "1100     13.25 

1500  "  1600     14 

Over  1050     14  + 

1100  "  1200     14 

1600  "  8200     14  + 

2  florins  for  every  hun- 

Over 1100     14  + 

2  per  cent  on  surplus 

dred  florins  on  surplus 

2  florins  for  every  hun- 

over fl.  1500. 

over  fl.  1050. 

dred  florins  on  surplus 

Over  fl.  8200,  fl.  148 

But  if  the  income,  to- 

over fl.  1100. 

-f  3.20  per  cent  on  sur- 

gether with  4  per  cent 

But  if  the  income,  to- 

plus over  fl.  8200. 

on  the  taxable  property, 

gether  with  4  per  cent 

exceeds  fl.  8150,  a  tax 

on  the  taxable  property, 

of  1.20  per  cent  is  pay- 

exceeds fl.  8200,  a  tax 

able  on  the  excess. 

of  1  .20  per  cent  is  pay- 

able on  the  excess. 

When  property  exceeds  fl.  200,000,  the  tax  is 

3.20  on  every  hundred  florins  income  over  fl.  200. 

330  ESSAYS  IN  TAXATION 

It  may  be  said,  in  passing,  that  there  are  two  additional 
schedules  in  the  income  tax  ;  corporations  being  taxed  in  all 
cases  two  and  one-half  per  cent,  and  foreign  travelling  sales- 
men paying  a  fixed  tax  of  fl.  15.  Of  the  administrative 
features  of  the  laws  the  chief  point  is  that  the  returns  both 
of  property  and  of  income  rest  on  the  principle  of  self- 
assessment,  supplemented  by  careful  official  scrutiny. 

After  the  passage  of  these  two  acts  Pierson  prepared  to 
undertake  the  reform  of  the  personal  tax  and  of  the  local 
revenue  system.  He  had  gone  so  far  as  to  contemplate  the 
introduction  of  the  progressive  scale  into  the  tax  on  house 
rentals ;  but  before  the  bill  could  be  discussed  and  before  his 
wider  plans  for  other  changes  were  completed,  he  was  com- 
pelled to  resign  for  reasons  entirely  disconnected  with  these 
financial  problems. 

The  reform  of  the  Dutch  tax  system  is  thus  only  partial; 
but  enough  has  been  accomplished  to  entitle  Pierson  to  a 
high  place  in  the  ranks  of  fiscal  reformers.  The  exaggerated 
burdens  on  the  lower  classes  have  been  lessened,  the  tax  on 
incomes  has  been  generalized  and  equalized,  and  the  princi- 
ples of  progression  and  of  differentiation  have  been  intro- 
duced ;  in  short,  there  has  been  a  notable  step  taken  toward 
the  realization  of  the  doctrine  of  faculty.  Although  open  to 
criticism  in  some  of  its  details,  the  change  represents  undeni- 
able progress. 

IV.  Prussia. 

While  England,  Holland  and  New  Zealand  have  been 
occupied  chiefly  with  the  reform  of  general  state  taxation, 
Prussia  has  been  fortunate  enough  to  take  one  step  further 
and  to  address  herself  to  the  solution  of  a  problem  which  the 
reformers  in  other  countries  declare  to  be  their  next  point  of 
attack.  The  reform  of  local  taxation,  and  the  establishment 
of  proper  relations  between  the  general  and  the  local  revenue 
systems  constitute  problems  which  to-day  confront  all  coun- 
tries ;  for  no  really  harmonious  system  of  taxation  can  ever 


RECENT  REFORMS  IN  TAXATION  331 

be  attained  until  the  claims  of  conflicting  or  overlapping 
jurisdictions  are  satisfactorily  adjusted.  In  federal  states 
like  Germany,  Switzerland  and  the  United  States  the  matter 
is  complicated  by  the  demands  of  the  central  government ; 
but  in  all  countries  the  fiscal  relations  between  the  state  and 
the  local  spheres  of  government  are  more  or  less  confused  and 
unsatisfactory.  The  immense  increase  in  local  needs  has 
everywhere  so  pushed  this  problem  into  the  foreground  that 
the  solution  just  inaugurated  in  Prussia  is  a  matter  of  far 
more  than  mere  local  importance. 

In  order  to  understand  the  situation,  it  is  necessary  to 
dwell  for  a  moment  on  the  Prussian  tax  system.  In  Prussia, 
as  well  as  in  the  other  German  states  and  in  most  of  the 
remaining  countries  of  the  continent,  the  state  system  has 
been  based  on  the  principle  of  taxing  product.  The  old 
general  property  tax  long  since  disappeared  and  was  re- 
placed by  a  system  which  attempted  to  reach  the  constituent 
elements  of  produce.  Instead  of  taxing  a  man  personally 
on  his  property,  the  plan  was  to  tax  the  various  sources 
of  revenue  themselves.  The  thing,  and  not  the  person,  was 
primarily  responsible  ;  and  therefore  the  new  taxes  received 
the  name  of  real  taxes,  as  compared  with  the  former  per- 
sonal taxes.1  These  taxes  on  product  (Ertragsteuern)  as  they 
are  called  in  Prussia,  or  real  taxes  (impdts  r€els)  as  they  are 
called  in  France,  everywhere  included  taxes  on  the  product 
of  land,  of  buildings  and  of  business.  In  addition  to  these, 
one  or  two  other  taxes  are  sometimes  made  use  of,  to  round 
out  the  system.  What  was  omitted  in  the  three  taxes  above 
was  the  product  of  money  lent  at  interest  and  the  produce  of 
labor.  Some  of  the  German  states  therefore,  desiring  to  be  logi- 
cal at  all  costs,  added  a  tax  on  interest  (Kapitalrentensteuer) 
and  a  tax  on  wages  (JLohn-  und  Besoldungsteuer).  In  most 
cases,  however,  the  wages  tax  was  omitted  because  the  laborer 
already  bore  more  than  his  share,  and  the  tax  on  inter- 

1  This  nomenclature  must,  of  course,  not  be  confused  with  that  sometimes 
employed  in  America,  where  real  taxes  mean  taxes  on  realty,  and  personal 
taxes  denote  taxes  on  personalty. 


332  ESS AyS  IN  TAXATION 

est  was  replaced  by  a  more  general  tax  which  endeavored  in 
some  way  to  reach  the  individual  condition  of  the  taxpayer. 
Thus  in  France  shortly  after  the  Revolution  the  "  personal 
and  movable"  tax  was  introduced,  which  tried  to  reach  a 
man's  individual  condition  through  his  expenditures  j1  while 
in  Prussia  the  three  taxes  mentioned  above  were  supple- 
mented by  a  class  tax,  which  was  to  reach  the  taxpayer  in 
some  rough  proportion  to  his  revenue. 

In  the  course  of  time,  however,  it  came  to  be  recognized 
that  product  was  for  many  reasons  too  rough  a  test  of 
faculty;  and  the  tendency,  recent  evidence  of  which  has 
been  seen  above,  was  to  replace  product  by  income.  Thus, 
the  class  tax  in  Prussia  was  somewhat  modified  as  early  as 
1821  in  the  direction  of  an  income  tax,  until  after  successive 
changes  in  1851  and  1873  it  became  a  complete  general 
income  tax  in  1891.  The  land,  house  and  business  taxes 
were  nevertheless  retained.  This  mixture  of  taxes  on 
product  and  on  income  was  recognized  as  illogical,  but 
was  defended  on  the  ground  that  the  government  could 
not  yet  dispense  with  the  former.  At  the  same  time  the 
business  tax  was  radically  reformed,  so  as  to  afford  a  far 
more  accurate  criterion  of  real  business  income.  The  re- 
form of  the  income  tax  and  of  the  business  tax,  while  exceed- 
ingly important,  will  be  passed  over  here,  partly  because  the 
laws  were  enacted  several  years  ago  and  have  been  well  treated 
as  separate  measures  elsewhere,2  and  partly  because  the 
principles  involved  are  about  the  same  as  those  alluded  to 
in  the  reform  of  Dutch  taxation.  Above  all,  the  real  sigiiifi- 

1  In  France,  it  is  true,  there  is  an  additional  tax,  "  the  door  and  window 
tax."     But  all  French  writers  confess  that  it  is  retained  simply  because  of 
the  difficulty  of  finding  anything  acceptable  to  take  its  place. 

2  Cf.  J.  A.  Hill,   "  The  Prussian  Income  Tax,"   Quarterly  Journal  of 
Economics,  vi.,  p.  207,  and  an  article  on  "The  Prussian  Business  Tax,"  by 
the  same  writer,  ibid,  viii.,  p.  77.    The  most  elaborate  treatment  of  the  sub- 
ject is  to  be  found  in  two  articles  by  Professor  A.  Wagner,  "Die  Reform 
der  direkten  Staatsbesteuerung  in  Preussen  im  Jahre  1891,"  Finanz-Archiv, 
viii.,  pp.  551-810,  and  xi.,  pp.  1-76.      Of.  the  articles  by  Jastrow,  "  Studien 
zur  preussischen  Einkommensteuer,"  in  Jahrbilcher  fur  Nationalokonomie 
und  Statistik,  Iviii.,  pp.  634,  839,  and  lix.,  p.  75. 


RECENT  REFORMS  IN  TAXATION  333 

cance  of  the  recent  Prussian  legislation  lies  in  a  different 
domain,  and  lias  not  yet  been  discussed  by  any  English  or 
American  writer. 

The  Prussian  legislator,  in  desiring  to  reform  the  whole  tax 
system,  was  confronted  by  several  tasks.  In  the  first  place, 
in  order  to  realize  the  principle  of  the  taxation  of  persons 
rather  than  of  product,  it  was  necessary  to  supplement  the 
income  tax  by  some  other,  so  that  their  joint  yield  would 
render  it  possible  to  dispense  with  the  taxes  on  product ; 
secondly,  it  was  necessary,  as  in  Holland  and  elsewhere,  to 
provide  for  a  differentiation  as  well  as  for  a  progression  of 
taxation ;  thirdly,  since  local  needs  differ  from  general  needs, 
a  distinction  had  to  be  drawn  between  the  sources  of  local 
and  general  revenue.  Separate  taxes  thus  had  to  be  assigned 
to  each  sphere  of  government  activity. 

Let  us  see  how  these  several  tasks  were  accomplished. 
Just  as  the  English  reforms  were  largely  the  work  of  Har- 
court,  and  as  the  Dutch  reforms  were  due  to  Pierson,  so  in 
Prussia  the  chief  credit  must  be  given  to  the  finance  min- 
ister, Dr.  Miquel,  although  he  was  here  simply  walking  in 
the  path  cleared  for  him  by  the  foremost  economists.1 

When  the  income-tax  law  of  1891  was  discussed,  the  hope 
was  expressed  that  its  yield  might  be  sufficient  to  enable  the 
state  to  do  away  with  the  taxes  on  product ;  for  notwith- 
standing the  labored  arguments  of  some  writers,  the  simulta- 
neous existence  of  income  and  of  produce  taxes  was  recognized 

1  The  leading  German  articles  on  the  topics  are  as  follows :  J.  Jastrow, 
"  Die  Vermogensteuer  und  ihre  Einfiigung  in  das  preussische  Steuersystem," 
Jahrbucher  fur  Nationalokonomie  und  Statistik,  lix.,  p.  161  ;  R.  Friedberg, 
"  Zur  Reform  der  Gemeindebesteuerung  in  Preussen,"  ibid,  pp.  321-341  ;  F. 
Adickes,  "Ueber  die  weitere  Entwickelung  des  Gemeinde-Steuerwesens  auf 
Grand  des  preussischen  Kommunalabgabengesetzes  vom  14  Juli,  1893,"  in 
Zeitschrift  fur  die  gesammte  Staatswissenschaft,  1L,  pp.  410-452,  583-658. 
The  best  treatment  of  the  whole  topic,  including  a  history  of  the  earlier  sys- 
tem, a  description  of  the  government  bills,  and  the  discussions  in  Parliament, 
as  well  as  the  text  of  the  law  itself  with  commentaries,  is  to  be  found  in  F. 
Adickes,  Das  Kommunalabgabengesetz  vom  14  Juli  1893,  fur  den  prak- 
tischen  Gebrauch  mit  einer  geschichtlichen  Einleitung  und  Erlauterungen 
versehen,  Berlin,  1894,  8vo,  396  pp. 


334  ESSAYS  IN  TAXATION 

as  illogical.  Even  though  the  principle  of  progression  was 
applied  to  the  income  tax,  it  was  thought  that  the  yield 
would  fall  far  short  of  the  desired  amount.  Since  an  increase 
of  the  rate  above  the  four  per  cent  fixed  in  the  law  as  a  maxi- 
mum was  impossible,  an  earnest  effort  was  made  to  expand 
the  existing  collateral  inheritance  tax  into  a  direct  inheritance 
tax.  This  plan,  however,  came  to  naught ;  and  nothing  re- 
mained, therefore,  but  to  continue  the  old  taxes  on  product. 

The  agitation,  nevertheless,  went  on  and  was  helped  along 
by  what  was  conceded  to  be  a  defect  in  the  income  tax. 
Although  the  principle  of  progression  had  been  introduced, 
no  provision  had  been  made  for  a  differentiation  of  the  rate. 
Income  from  labor  was  taxed  at  the  same  rate  as  income 
from  property.  Dr.  Miquel  therefore  proposed  to  introduce 
a  supplementary  property  tax,  hoping  in  this  way  to  achieve 
both  of  the  desired  results.  Since  this  property  tax,  like  all 
nominal  property  taxes,  would  really  be  paid  out  of  the 
income  of  the  property,  it  was  thought  that  it  would  act  as 
an  additional  tax  on  income  in  so  far  as  the  income  was 
derived  from  property.  Incomes  from  labor  would  pay  only 
the  income  tax ;  incomes  from  property  would  pay  both 
income  tax  and  property  tax.  Thus  a  practical  differentia- 
tion would  be  introduced.  This  supplementary  tax,  more- 
over, would  be  levied  on  the  property  owner  and  would  be  a 
substantial  addition  to  the  personal  taxes,  rendering  it  pos- 
sible for  the  state  to  dispense  with  the  taxes  on  product. 

This  reasoning  prevailed,  and  resulted  in  the  enactment  of 
the  law  of  1893,  which  was,  however,  not  to  go  into  force 
until  April  1,  1895. 1  The  law  provided  for  a  "  supplemen- 

1  Erganzungssteuergesetz  von  14  Juli,  1893.  The  tax  is  arranged  in  classes 
so  that  the  one-half  mill  rate  applies  only  to  the  lowest  figures  in  each  class. 

Property.  Tax. 

Thus    6,000  to    8,000  marks  pay    3  marks. 
10,000  to  12,000          "  5      " 

20,000  to  22,000  "  10  " 
40,000  to  44,000  "  20  " 
60,000  to  70,000  "  30  «« 

From  70,000  to  200,000  m.  the  tax  increases  5  marks  for  each  10,000  m. 
Above  200,000  m.  the  tax  increases  10  marks  for  each  20,000  m. 


RECENT  REFORMS  IN  TAXATION  335 

tary  tax  "  of  five-tenths,  or  one-half  of  one,  per  mill,  on  all 
property.  Exemption  is  granted  to  all  property  of  less  than 
6,000  marks ;  to  all  persons  whose  income  does  not  exceed 
900  marks,  provided  their  property  does  not  exceed  20,000 
marks ;  and  to  women  wage  earners  and  minor  orphans 
whose  income  does  not  exceed  1200  marks,  and  whose  prop- 
erty does  not  exceed  20,000  marks. 

What  is  more  important  is  the  change  that  was  now  made 
possible  in  the  local  revenue  system,  and  in  its  relation  to  the 
state  system. 

The  German  local  revenue  system  was  exceedingly  unsat- 
isfactory. In  most  of  the  towns  indirect  taxes  on  consump- 
tion played  a  considerable  role ;  in  some  places  indirect 
taxes  on  transfers  yielded  a  substantial  sum.  But  so  far 
as  direct  taxes  are  concerned,  we  find  everywhere  that  the 
towns  simply  added  a  percentage  to  the  state  taxes,  which 
in  most  cases  would  be  taxes  on  product,  like  the  land, 
house,  business,  interest,  and  wages  taxes.  Where  state 
income  taxes  existed,  a  local  percentage  was  also  added,  so 
that  the  amount  of  income  taxes  alone  paid  by  a  townsman 
often  exceeded  eight  or  ten  per  cent.  Only  in  four  towns, 
among  them  Berlin  and  Frankfort,  were  there  any  taxes  on 
rentals.  In  order  to  present  the  facts  clearly,  the  table  on 
the  following  page  is  appended.  In  Prussia  the  matter  was 
still  further  complicated  by  the  so-called  Lex  Huene  of  1885, 
which  provided  that  a  certain  share  of  the  imperial  duties 
on  agricultural  products  should  go  to  the  local  divisions 
instead  of  to  the  state. 

The  shortcomings  of  this  whole  system  were  so  obvious 
and  became  so  intolerable  that  Prussia  boldly  attempted  to 
abolish  them  at  one  stroke.  The  fundamental  principles 
that  emerged  in  the  discussion  of  the  subject  during  the 
session  1892-93  may  be  summarized  as  follows. 

The  relation  of  the  individual  to  the  local  community  is 
somewhat  different  from  his  relation  to  the  state  at  large. 
The  town  is  to  a  certain  extent  an  association  of  business 
interests.  While  therefore  the  obligation  of  the  citizen  to 


336 


ESSAYS  IN  TAXATION 


aad  saxux  IB;OX 

1     coSooSlocMOsSooSosTSgPcoooSSSSSS 

NOTE.—  The  figures  are  in  marks.  The  table  is  taken  from  Neefe,  Statistisches  Jahrbuch  Deutscher  Stadte,  Zweiter 
Jahrgang,  1892,  pp.  384  et  seq.  It  is  quoted  in  part  in  the  essay  by  Adickes,  p.  415,  who  has  arranged  the  cities 

according  to  their  location  in  the  various  commonwealths.  The  third  annual  statistical  publication  for  1893  omits 
the  figures  of  taxation.  They  will  be  given  in  the  issue  for  1894,  which  has  not  yet  appeared. 

<M  to  to  co  m  os  to  co  o  co  o  «  to  oo  o  os  co  to  co  os  o  10 

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CO        t—           r  ^  OO              r-<  C^  r-t  t—  O  t-  T-«  O  rt  00  r-"  O 

is  S    |Ss     ||Iglsll§|p 

•89XBX  I«;ox 

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^oT«o"iC  to"to"TH  co'to'cc  cTcM  to  CM  ao"-^To  i-Tto  ^H  o"oT 

S^CO  CMTHTHT-I                     CM(MCOrlT-l                           TH 

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^  S5^ig3  1  g  ij-l  E  2  §!?  c-S  ?,S  |=^ 

RECENT  REFORMS  IN  TAXATION  337 

contribute  to  the  general  burdens  should  be  regulated  by 
the  principle  of  faculty  or  ability,  it  is  eminently  proper  that 
in  the  case  of  the  local  bodies  more  attention  should  be 
paid  to  the  principle  of  benefits.  In  the  local  divisions,  an 
extension  should  be  given  to  the  principle  underlying  what 
in  the  United  States  are  called  special  assessments  and 
fees.  An  argument  of  somewhat  the  same  nature  —  a  dis- 
cussion of  its  precise  terms  would  carry  us  too  far  astray  — 
led  to  the  demand  for  the  real  estate  tax  as  one  of  the  chief 
sources  of  local  revenue.  A  tax  on  real  estate  is  a  real 
tax,  a  tax  on  product;  it  is  not  a  personal  tax.  Moreover, 
the  real  estate  tax  is  an  especially  good  local  tax,  partly 
because  the  benefits  of  local  expenditure  accrue  primarily 
to  real  estate  and  thus  increase  the  faculty  of  the  owner; 
partly  because  making  it  a  local  tax  would  at  once  remove 
from  the  public  arena  the  unseemly  disputes  about  inequality 
of  rates  and  about  equalization,  with  which  the  public  is 
scarcely  less  familiar  abroad  than  in  America. 

On  the  other  hand,  the  income  tax  is  unsuitable  for  a  local 
tax,  chiefly  because  amid  modern  complications  income  can- 
not well  be  localized.  The  sphere  of  local  indirect  taxes, 
also,  should  be  restricted,  because  local  taxes  on  con- 
sumption are  apt  to  press  with  undue  severity  on  the 
poorer  classes.  But  since  other  classes,  as  well  as  real 
estate  owners,  share  the  duty  of  contributing  to  local  bur- 
dens, the  real  estate  tax  should  be  supplemented  by  a  busi- 
ness tax,  in  the  shape  of  a  real  tax,  rather  than  of  a  personal 
tax.  Thus  the  conclusion  is  easily  reached :  personal  taxes  in 
the  shape  of  an  income  tax  and  of  a  supplementary  property 
tax  for  the  state  government ;  real  taxes,  like  the  land 
tax,  the  house  tax  and  the  business  taxes  for  the  local  bodies. 
If  we  join  to  this  a  diminution  in  the  local  indirect  taxes, 
and  an  increase  of  special  assessments  and  of  fees,  we  shall 
have  a  system  which  is  logically  defensible  and  practically 
workable. 

In  accordance  with  these  ideas  were  passed  the  three  great 
laws  of  July  14,  1893.  The  first  law,  which  has  already 


338  ESSAYS  IN  TAXATION 

been  mentioned,  provided  for  the  supplementary  property 
tax.  The  second  law 1  abolished  as  sources  of  state  revenue 
the  real  taxes  —  that  is,  the  land  tax,  the  house  tax,  the 
business  tax  and  the  old  tax  on  mines,  the  first  three  being 
handed  over  to  the  communes  or  local  bodies,  and  some  minor 
changes  being  made  in  the  business  tax  with  the  same  end 
in  view.  This  law,  like  the  others,  was  not  to  go  into  effect 
until  April  1,  1895 ;  partly  in  order  to  leave  time  for  the 
arrangement  of  the  local  system,  partly  in  order  to  enable  the 
state  income  tax  to  be  perfected  so  that  its  increased  yield 
would  more  than  compensate  for  the  loss  of  the  taxes  on 
product.  Finally,  the  third  law2  regulated  the  sources  of 
local  revenue. 

According  to  this  law,  the  local  bodies  are  not  only  per- 
mitted, but  directed,  to  impose  fees  and  special  assessments 
in  cases  where  the  local  action  results  in  a  special  measurable 
benefit  to  the  individual ;  and  the  extent  of  these  charges  is 
definitely  regulated.  Indirect  taxes  are  not  forbidden,  but  it 
is  provided  that  no  new  or  increased  taxes  may  be  imposed 
on  meat,  corn  or  bread,  potatoes  or  the  articles  of  common 
consumption.  Direct  taxes  may  be  imposed  on  real  estate 
and  on  business.  In  special  cases  a  local  income  tax  may  be 
levied  as  an  addition  to  the  state  income  tax ;  but  a  maximum 
is  fixed  and  permission  is  given  to  substitute  in  its  stead  taxes 
on  expenditure,  which  must  be  so  arranged  as  not  to  impose 
on  the  poor  a  heavier  burden  than  on  the  rich.  In  no  case 
may  a  local  general  property  tax  be  imposed,  nor  may  the 
existing  taxes  on  rentals  be  increased.  The  statute  does  not 
affect  in  any  way  the  rights  of  the  local  bodies  to  revenue 
from  industrial  enterprises  or  municipal  monopolies,  with 
the  one  exception  that  the  charges  must  be  sufficient  to 
provide  a  revenue  at  least  equal  to  the  interest  on  the  outlay 

1  Gesetz  wegen  Aufhebung  direkter  Staatssteuern.     This  is  printed  in 
Finanz-Archiv,  x.,  pp.  795-801. 

2  Preussisches    Kommunalabgabengesetz.    This   has  been  published   in 
Finanz-Archiv,  x.,  pp.  318-341.     The  best  edition  is  the  one  of  Adickes, 
mentioned  above,  with  commentary  and  notes. 


RECENT  REFORMS  IN  TAXATION  339 

and  a  yearly  addition  to  the  sinking  fund.  The  law  closes 
with  some  minor  provisions  applicable  to  county  or  pro- 
vincial revenues. 

Into  the  details  of  these  laws  it  is  manifestly  impossible  to 
go.  Were  there  space,  it  would  be  fruitful  to  call  attention 
to  some  errors  in  the  general  theory  and  to  some  mistakes 
in  the  practical  arrangements.  Thus  the  abolition,  rather 
than  the  improvement,  of  the  rentals  tax  ;  the  retention  of 
the  indirect  taxes  ;  the  failure  to  provide  for  a  state  inheri- 
tance tax ;  and  the  inadequate  working  out  of  the  principles 
of  the  corporation  tax  constitute  undeniable  blemishes.  All 
these  defects,  however,  sink  into  insignificance  when  com- 
pared with  the  one  great  boon  —  the  final  acceptance  of  the 
principle  of  the  segregation  of  source  as  between  local  and 
state  revenues.  For  this  all  reformers  have  been  contending 
the  world  over  —  in  France  as  in  Australia,  in  Italy  as  in 
America.  To  have  successfully  accomplished  this  result  and 
to  have  brought  it  into  harmony  with  the  doctrine  of  faculty, 
is  an  achievement  of  sufficient  importance  to  entitle  Dr. 
Miquel  to  a  high  place  in  the  ranks  of  fiscal  reformers.  The 
year  1895  will  mark  an  epoch  not  only  in  Prussian,  but  also 
in  international  finance. 

After  this  survey  it  is  needless  to  point  out  the  lessons  appli- 
cable to  the  United  States.  The  economic  conditions  of  the 
civilized  world  are  everywhere  fast  becoming  the  same  ;  and 
upon  the  changes  in  economic  conditions  depend  the  changes 
in  financial  systems.  In  old  Europe  as  well  as  in  young  Aus- 
tralia the  same  tendency  is  unmistakable  —  the  trend  to 
greater  justice  in  taxation.  When  four  widely  distant  coun- 
tries reform  their  systems  almost  simultaneously,  and  upon  the 
same  general  lines,  the  inference  is  irresistible  that  the  causes 
of  the  movement  are  of  far  more  than  mere  local  significance. 
To  shut  our  eyes  to  this  world-wide  movement  would  be 
supreme  folly ;  to  profit  by  its  lessons  and  to  bring  our  own 
system  into  line  with  the  demands  of  modern  science  and  of 
modern  conditions  will  be  no  less  wise  than  it  is  inevitable. 


CHAPTER   XI. 

THE    BETTERMENT    TAX. 

IT  has  often  happened  that  the  technical  name  of  a  new 
custom  has  been  borrowed  from  abroad;  but  it  is  rare  to 
find  a  foreign  institution  described  by  an  exceedingly  uncom- 
mon term,  which  is  then  naturalized  on  the  assumption  that 
foreign  usage  is  being  followed.  This,  however,  is  the  case 
with  the  "  Betterment  Tax  "  in  England.  The  institution  is 
indeed  found  in  America,  but  the  name  is  unusual  there. 
Exactly  when  and  how  the  term  came  to  be  introduced  into 
England  is  uncertain ; *  but  nine  out  of  ten  Englishmen, 
when  using  the  expression,  think  that  they  are  following 
the  American  custom.  It  has  now  become  so  current  in 
England  that  it  may  be  considered  as  firmly  established. 

I.    The  Origin. 

The  principle  of  betterment  has  recently  been  defined  by 
an  official  commission  as  "the  principle  that  persons  whose 
property  has  clearly  been  increased  in  market  value  by  an 
improvement  effected  by  local  authorities,  should  specially 
contribute  to  the  cost  of  the  improvement."2  Another  offi- 
cial report  deals  specifically  with  "assessments  according 
to  benefits  (betterment  or  amelioration),"  and  defines  the 

1  The  Duke  of  Argyll,  in  a  speech  in  the  House  of  Lords,  referred  to  it  as 
an  "  absurd,  foreign  and  vulgar"  word.     Mr.  Baumann,  on  the  other  hand, 
says :  "  The  word  is  respectable,"  but  "  the  thing  is  not."     Almost  the  only 
state  in  America  where  the  term  "betterment  tax"  is  to  be  found  is  Massa- 
chusetts: and  even  this  is  true  mainly  of  the  earlier  laws  and  cases. 

2  Report  from  the  Select  Committee  of  the  House  of  Lords  on  Town  Im- 
provements (Betterment},  1894. 

340 


THE  BETTERMENT  TAX  341 

custom  as  "  assessment  according  to  benefits,  and  the  intercep- 
tion by  charge  upon  property  of  a  portion  of  the  value  added 
to  such  property  by  the  expenditure  of  public  money  for 
improvement."1  To  all  Americans  it  will  be  apparent  at 
once  that  what  we  are  dealing  with  is  nothing  but  the  system 
of  special  assessments. 

f  What  appears  almost  self-evident  to  Americans  is  hotly 
disputed  in  England.  In  the  United  States  the  local  taxes, 
so  far  as  real  estate  is  concerned,  are  imposed  on  the  owner 
of  the  land;  in  England  the  local  rates,  as  they  are  called, 
are  levied  on  the  occupier.  In  the  United  States  the  tax  is 
assessed  on  all  land;  in  England  it  is  assessed  only  on  pro- 
ductive or  rent-yielding  land.  In  the  United  States,  there- 
fore, it  was  comparatively  easy  to  add  to  the  existing  tax  on 
the  proprietor  this  newer  system  of  charges ;  in  England 
the  process  is  more  difficult,  because  it  implies  not  only 
a  change  in  the  principle  of  charge,  but  also  a  change  in 
the  method  of  assessment.  Not  the  occupier,  but  the  owner 
of  the  land,  is  to  be  directly  reached.  Thus  the  pro- 
posal, which  in  America  is  regarded  as  in  harmony  with 
vested  interests,  is  viewed  by  its  opponents  in  England  as  an 
,  attack  on  the  rights  of  private  property. 

Yet,  curious  as  it  may  seem,  the  custom  of  assessments 
for  special  benefits  is  of  English  origin.  In  the  year  1662, 
an  act  was  passed  to  authorize  the  widening  of  certain  streets 
in  Westminster  and  providing  for  the  defrayal  of  the  cost 
by  voluntary  subscriptions.  In  case  this  should  not  suffice, 
the  commissioners  to  lay  out  the  .streets  were  empowered  to 
charge  the  owners  of  the  property  in  proportion  to  the 
benefits  received.2  The  important  clause  reads  : 

"And  whereas,  the  houses  that  remain  standing  .  .  .  will  re- 
ceive much  advantage  in  the  value  of  their  rents  by  the  liberty  of 
ayr  and  free  recourse  for  trade  and  other  conveniences  by  such 
enlargement,  it  is  enacted  .  .  .  that  ...  a  jury  .  .  .  shall  .  .  . 

1  Orange  Book  of  the  London  County  Council,  entitled  Precedents  of 
Assessment  according  to  Benefits,  1893. 
8  13  and  14  Chas.  II.,  chap.  2,  sec.  29. 


342  ^.S^KS"  IN  TAXATION- 

judge  and  assess  upon  the  owners  and  occupiers  of  such  houses, 
such  competent  sum  or  sums  of  money  or  annual  rent,  in  consid- 
eration of  such  improvement  and  renovation  as  in  reason  and 
good  conscience  they  shall  judge  and  think  fit." 

Five  years  later  a  similar  act  was  passed,  to  provide  for 
the  rebuilding  of  the  city  of  London  after  the  great  fire. 
This  contained  an  almost  verbal  repetition  of  the  clause  just 
cited.  The  changes  were:  first,  that  the  charge  was  then  to 
be  made  "  in  consideration  of  such  improvement  and  meliora- 
tion," instead  of  "  improvement  and  renovation "  ;  and,  sec- 
ondly, that,  whereas  the  charge  of  1662  was  to  be  assessed 
on  the  "  owners  and  occupiers,"  the  new  charge  was  to  be 
levied  on  the  "  owners  and  others  interested,  of  and  in  such 
houses,"  according  to  "their  several  interests."1  That  this 
law  was  not  a  mere  dead  letter  is  shown  by  a  passage  in 
Pepys*  Diary  where  the  actual  operation  of  "  the  benefit  of 
the  melioration  "  is  interestingly  described.2 

Thus,  over  two  hundred  years  ago  the  principle  over  which 
so  earnest  a  contest  is  now  being  waged  was  in  full  opera- 
tion and  in  the  very  city  where  it  is  vehemently  assailed  as 
an  unjust  system  of  foreign  importation. 

The  law  of  1667  is  interesting  in  another  respect.  Not 
only  were  new  streets  to  be  laid  out,  but  the  commissioners 
were  empowered  to  design  and  set  out  "the  numbers  and 
places  for  all  common  sewers,  drains  and  vaults,  and  the 
order  and  manner  of  paving  and  pitching  the  streets  and 
lanes  within  the  said  city  or  liberties  thereof."  Then  follows 
the  significant  section  :  3  — 

For  the  better  effecting  thereof,  it  shall  ...  be  lawful  .  .  . 
to  impose  any  reasonable  tax  upon  all  houses  within  the  said  city 
or  liberties  thereof,  in  proportion  to  the  benefit  they  shall  receive 
thereby,  for  and  towards  the  new  making,  cutting,  altering,  en- 
larging, amending,  cleansing  and  scouring  all  and  singular  the 
said  vaults,  drains,  sewers,  pavements  and  pitching  aforesaid. 

1  18  and  19  Chas.  II.,  chap.  18,  sec.  24. 

2  Pepys1  Diary,  under  date  Dec.  3,  1667.    The  passage  is  quoted  in  the 
London  County  Council's  Orange  Book  of  Precedents,  p.  37. 

3  19  Chas.  II.,  chap.  3,  sec.  20. 


THE  BETTERMENT  TAX  343 

Here  not  only  is  the  word  "  benefit "  used,  but  the  charge 
is  called  a  tax.  Still  more  important  is  the  fact  that  while 
the  custom  itself  seems  to  have  died  out  in  England,  this  act 
was  the  model  upon  which  was  framed  the  first  law  provid- 
ing for  special  assessments  in  America.  The  province 
law  of  1691  of  New  York  followed  the  law  of  1667  almost 
word  for  word;  and  from  New  York,  the  custom  later  spread 
all  over  the  United  States.  The  system  of  special  assess- 
ments or  "  betterment,"  although  it  fell  into  disuse  in  the  coun- 
try of  its  origin,  is  thus  primarily  an  English  institution.1 

II.    Betterment  and  Taxation. 

We  now  come  to  the  question  which  really  lies  at  the  root 
of  the  whole  controversy  in  England :  Is  the  so-called 
"betterment  tax"  a  true  tax  or  "local  rate"?  What 
appears  to  be  merely  a  question  of  terminology  has  led 
to  a  great  deal  of  confusion.  For  if  it  is  a  tax  or  rate, 
why  should  it  be  levied  differently  from  other  rates  ?  And 
if  it  is  not  a  tax  or  rate,  under  what  authority  can  it  be 
levied  at  all? 

We  must  revert  to  what  has  already  been  said  in  a  previous 
chapter,  but  it  is  necessary  to  discuss  the  subject  somewhat 
more  in  detail. 

As  we  have  already  seen,  when  the  state  makes  the  indi- 
vidual give  up  a  part  of  his  property,  it  does  so  primarily 
through  the  power  of  taxation,2  which  in  this  wider  sense 
denotes  a  forced  contribution.  Governments  may  levy,  and 
have  always  levied,  these  forced  contributions  according 
to  different  principles  —  either  that  of  benefit,  or  that 
of  ability.  They  may  say  to  the  individual :  we  are 

1  Rose  water,  Special  Assessments  (mentioned  supra,  p.  283),  was  the  first 
to  prove  this.     It  is  worthy  of  note  that  we  find  two  instances  already  in 
New  Amsterdam  in  1657  and  1660.     See  Paulding,  Affairs  and  Men  of  New 
Amsterdam  in  the  Time  of  Governor  Stuyvesant,  1843,  pp.  14  and  16.     But 
each  was  a  sporadic  case,  applying  only  to  a  specific  street. 

2  The  revenue  from  expropriation  and  fines  may  be  passed  over  as  insig- 
nificant. 


344  ESSAYS  IN  TAXATION 

performing  a  special  service  for  you,  and  shall  make  you 
pay  for  this  peculiar  benefit  which  you  derive ;  or  they 
may  say  :  we  are  expending  certain  moneys  in  the  public 
interest,  and  shall  ask  you  to  pay  your  share,  according  to 
your  means.  The  latter  payment  is  called  a  tax  in  the  nar- 
rower sense  of  the  word.  The  question  at  once  presents 
itself :  Is  not  the  former  payment  also  a  tax  ? 

The  difficulty  here  arises  from  confounding  special  with  gen- 
eral benefits.  The  theory  of  benefits  or  of  protection  is  true 
in  the  sense  that  if  the  government  taxes  the  people,  it  is  in 
duty  bound  to  protect  them  and  to  confer  upon  them  the 
advantages  of  good  government.  That  is  what  is  meant  in 
America  by  the  doctrine  of  "public  purpose."  Taxes  must 
be  used  for  public  purposes,  and  must  confer  upon  the  pub- 
lic the  usual  benefits  of  government.  But  this  is  not 
the  theory  of  benefit  as  the  term  is  commonly  employed. 
The  theory  of  benefit  claims  that  the  government  must  give 
to  each  individual  a  return  equivalent  to  the  tax  he  has 
paid.  If  this  means  anything  at  all,  it  means  that  bene- 
fit and  taxation  are  correlative.  In  this  sense,  the  claim 
is  unfounded ;  for  the  government,  when  it  levies  a  tax, 
never  guarantees  to  do  a  particular  thing  for  the  partic- 
ular individual,  or  to  confer  upon  him  a  special  benefit.  No 
one  would  be  justified,  legally  or  morally,  in  claiming  a  resti- 
tution of  a  tax  because  the  action  of  the  government  was 
not  worth  quite  so  much  to  him  as  he  thinks  it  is  worth  to 
his  neighbor.  The  benefits  of  state  action,  for  which  a  tax 
is  paid,  are  quantitatively  unmeasurable  ;  or,  so  far  as  they 
may  be  measured,  they  accrue  to  the  individual  not  as  a 
special  result,  but  as  an  incidental  result  of  his  participa- 
tion in  the  common  weal.  The  benefits  of  the  army,  of 
the  judicial  system,  of  the  consular  and  diplomatic  ser- 
vice, and  of  all  the  other  objects  for  which  expenditures 
are  made  and  taxes  in  general  are  levied,  do  not  accrue 
to  any  one  taxpayer  more  than  to  another.  Even  in 
local  finance,  where  a  general  tax  is  levied  to  defray  all 
the  local  expenditures,  it  cannot  be  maintained  that  the 


THE  BETTERMENT  TAX  345 

benefits  arising  from  the  action  of  the  local  judiciary,  of  the 
police,  of  the  fire  service,  of  the  board  of  health,  or  of  the 
other  departments  of  local  government  are  separately  meas- 
urable for  each  individual.  One  may  value  the  benefits 
greatly,  while  another  may  feel  less  interest  in  that  particu- 
lar branch  of  the  administration;  yet  this  cannot  be  permitted 
to  change  the  measure  of  their  obligations  to  the  govern- 
ment. Every  member  of  the  community  for  which  these 
expenditures  are  made  must  contribute  to  these  expendi- 
tures in  proportion  to  his  means  to  pay.  If  the  govern- 
ment neglect  its  duty  and  fail  in  protecting  his  person 
from  violence  or  his  property  from  fire  or  from  destruc- 
tion, he  may  use  his  political  rights  in  overturning  or  in 
improving  the  administration;  but  he  has  no  shadow  of 
a  claim  for  a  diminution  of  his  tax  rate.  Protection  and 
taxation,  in  this  sense,  are  not  correlative. 

We  have  thus  far  been  dealing  with  general  taxes,  whether 
federal,  state  or  local.  A  general  tax  is  a  tax  levied  for  gen- 
eral public  purposes.  But  it  may  happen  that  government 
desires  to  raise  money  for  some  special  purpose,  and  the  tax 
is  then  called  a  special  tax.  Thus  there  may  be  a  special 
tax  levied  upon  the  whole  community  to  defray  the  cost  of  a 
war,  or  there  may  be  a  special  local  tax  to  defray  the  cost  of 
some  particular  department.  So,  too,  in  a  few  of  the  Ameri- 
can states,  like  New  Jersey,  we  find  not  only  a  special  school 
tax,  but  special  taxes,  of  the  same  nature  as  the  English 
local  rates,  for  police  or  for  lighting  or  j»r  fire  purposes. 
Here,  it  is  true,  a  special  class  of  the  community  is  singled 
out ;  and  one  area  is  subject  to  the  poor  rate,  while  perhaps 
another  is  subject  to  the  watching  or  the  lighting  rate.  The 
charge,  however,  is  still  a  tax,  levied  according  to  the  prin- 
ciple of  ability  ;  for  although  the  particular  area  which  is 
benefited  is  put  into  a  separate  class,  the  benefits  to  the 
individuals  of  the  class  are  general,  not  special,  exclusive, 
or  individual  benefits.  Although  all  the  persons  liable  to 
this  special  tax  are  subject  to  the  tax  only  because  the  class, 
as  a  whole,  derives  a  benefit,  yet  each  individual  derives  a 


346  ESSAYS  IN  TAXATION" 

benefit,  if  at  all,  simply  as  a  member  of  the  class  ;  the  gov- 
ernment does  not  do  any  one  particular  thing  for  him,  as 
apart  from  the  other  members  of  the  class.  The  "  rate  "  is 
a  special  tax  as  opposed  to  a  general  tax,  because  it  defrays 
a  special  expenditure  of  government ;  but  as  to  every  one 
within  the  class,  the  tax  is  payable  whether  the  particular 
individual  receives  much  or  little  benefit. 

In  the  poor  rate,  for  instance,  the  original  law  expressly 
provided  for  assessments  according  to  the  ability  of  the  pa- 
rishioners, or,  as  it  was  subsequently  expressed,  ad  statum  et 
facultates  of  the  inhabitants.  The  degree  of  benefit  accruing 
to  each  ratepayer  is  immaterial;  for  the  rate  is  levied  on  all 
the  inhabitants  according  to  the  English  test  of  ability  to 
pay,  which  was  originally  general  property,  but  which  has 
since  then  been  confined  to  productive  real  estate. 

On  this  poor  rate  all  the  other  local  taxes,  with  only  one 
or  two  exceptions,  were  built  up.  Of  the  church  rate  nothing 
more  need  be  said,  since  it  has  always  been  imposed  on  the 
same  principle  as  the  poor  rate.1  The  sewers  rate  was  origi- 
nally levied  by  a  law  of  1427,  which,  as  well  as  its  successor 
of  1531,  does  indeed  speak  of  the  benefits  or  advantages 
to  be  derived.  Some  recent  writers  have  been  misled  by 
this  statement  into"  the  belief  that  it  is  a  precedent  for 
the  principle  of  betterment.  A  careful  reading  of  the 
original  acts,  however,  proves  that  the  benefit  is  jurisdic- 
tional  only,  i.e.  that  a  certain  district  is  to  be  selected 
where  the  inhabitants  derive  a  benefit  from  this  govern- 
mental action,  but  that  the  rate  or  tax  is  to  be  assessed 
on  each  individual  according  to  the  quantity  of  his  lands, 
irrespective  of  the  degree  of  benefit  conferred  upon  him.2 

1  The  church  rate  is  said  formerly  to  have  been  made  by  common  estima- 
tion.    "What  principle  this  common  estimation  was  founded  on  does  not 
appear,  but  it  was  always  undoubtedly  in  reference  ad  statum  et  facultates, 
that  the  burden  was  imposed."    Eeport  of  the  Poor  Law  Commissioners  on 
Local  Taxation,  1843,  8vo  edition,  p.  43.     Cf.  ibid.,  p.  22. 

2  The  law  of  1427  enjoins  the  commissioners  "  to  enquire  ...  by  whose 
default  such  damages  have  there  happened,  aud  who  doth  hold  lands  and 
tenements,  or  hath  any  common  of  pasture  or  fishing  in  those  parts,  or  else 


THE  BETTERMENT  TAX  347 

At  that  period  the  test  of  ability  to  pay  was  the  quantity  of 
land,  but  later  the  test  became  the  rental  value  of  the  land. 
It  has,  moreover,  been  repeatedly  decided  that  the  sewers 
rate  must  be  levied  on  the  principle  of  ability,  so  that  the  offi- 
cial commission  tells  us  that  the  sewers  rate  "  is  commonly 
imposed  in  exactly  the  same  manner"  as  the  poor  rate.1 

Even  American  commentators  have  been  led  astray  by 
the  example  of  the  sewers  rate.2  It  is  true  that  landhold- 
ers lying  beyond  the  area  in  question  cannot  be  taxed, 
because  they  do  not  belong  to  the  class  ;  but  the  essential 
point  is  that  all  the  members  of  the  class  are  taxed,  not 
according  to  the  benefits  they  receive,  but  according  to  their 
abilities.  The  official  commission  tells  us  explicitly  :  "  It  is 
an  indispensable  condition  (of  the  sewers  rate)  that  a  per- 
son taxed  may  by  possibility  receive  benefit  from  the  expen- 
diture of  the  tax,  and  therefore  holders  of  mountainous  or 
high  ground  which  cannot  be  surrounded,  are  in  general  ex- 

in  any  wise  have,  or  may  have,  the  defence,  profit  and  safeguard,  as  well  in 
peril  nigh  as  from  the  same  far  off,  by  the  walls,  ditches,  gutters,  sewers, 
bridges,  causeys  and  wears,  and  also  hurt  or  commodity  by  the  same 
trenches,  and  then  to  distrain  all  them  for  the  quantity  of  their  lands  and 
tenements,  either  by  the  number  of  acres  or  by  their  plow  lands,  for  the 
rate  of  the  portion  of  their  tenure,  or  for  the  quantity  of  their  common  of 
pasture  or  fishing,  together  with  the  bailiffs  of  liberties  and  other  places  of 
the  county  and  places  aforesaid."  6  Hen.  VI.,  chap.  4. 

The  law  then  directs  the  commissioners  to  make,  repair,  or  cleanse  or  stop 
up  the  trenches,  etc.,  "so  that  no  tenants  of  lands  or  tenements  .  .  .  nor 
other  of  what  condition,  state  or  dignity,  which  have  or  may  have  defence, 
commodity  and  safeguard  by  the  said  walls,  ditches,  etc.  ...  or  else  any 
hurt  by  the  same  trenches  .  .  .  shall  in  anywise  be  spared."  Ibid.,  chap.  5. 

The  law  of  1531  contains  almost  the  same  words,  and  assesses  the  rate 
"  after  the  quantity  of  their  lands,  tenements  and  rents,  by  the  number  of 
acres  and  purchase,  after  the  rate  of  every  person's  portion,  tenure  or  profit." 
23  Hen.  VIII.,  chap.  v.  There  is  no  mention  of  any  varying  degree  of  bene- 
fit as  the  basis  of  the  rate. 

1  Report  of  the  Poor  Law  Commissioners  on  Local  Taxation,  p.  22. 

2  Cooley,   Taxation,  chap.  xx.     Baumann,  Betterment  (1893),  p.  6,  cor- 
rectly enough  calls  attention  to  this :  "  It  is  most  important  not  to  confuse 
rating  zones  .  .  .  with  betterment.     All  the  individuals  within  a  rating  zone 
pay  the  same  proportion  irrespective  of  the  quantum  of  benefit  which  each 
individual  may  receive.     But  the  quantum  of  benefit  received  by  the  indi- 
vidual is  the  essence  of  betterment." 


348  ESSAYS  IN  TAXATION 

empt.     Still,  the  exact  measure  of  the  benefit  is  not  the  measure 
of  the  liability  to  be  taxed" 1 

The  nearest  approach  to  the  principle  of  benefits  is  found 
in  some  of  the  English  lighting  and  watching  rates,  where  a 
distinction  is  drawn  between  land  proper  and  improved  prop- 
erty, and  where  the  occupiers  of  land  pay  only  one-third  as 
much  as  the  occupiers  of  houses  and  other  buildings,  possibly 
on  the  assumption  that  they  do  not  get  so  much  benefit.2 
Yet  even  here  there  are  only  two  classes  —  lands  and  improve- 
ments—  and  the  charge  upon  the  individual  occupier  is  not 
proportioned  to  the  special  benefits  he  receives;  he  is  thrown 

1  Report  of  the  Poor  Law  Commissioners  on  Local  Taxation,  p.  65.    The 
statement  in  the  text  is  strictly  true  of  the  ordinary  sewers  rate.    Yet  in 
more  recent  years  there  is  an  occasional  instance  of  a  charge  under  special 
sewers  acts,  where  we  find  not  only  a  separate  area  for  the  property  bene- 
fited, but  where  it  is  permissible  to  levy  a  charge  on  each  separate  piece  of 
land  according  to  the  benefits  specially  derived.    These  isolated  examples 
would  indeed  be  precedents  for  "  betterment  taxation  "  or  assessment  accord- 
ing to  special  benefit.    So  the  Metropolitan  Sewers  Act  of  1848  gave  the  com- 
missioners power  to  levy  the  charge  on  the  various  "  lands  or  tenements  in 
proportion  to  the  several  lengths  of  frontage  abutting  on  such  sewer  as  afore- 
said or  when  all  the  lands  or  tenements  specially  benefited  or  drained  by 
such  works,  or  when  in  any  other  case  an  assessment  according  to  frontage 
shall  appear  to  the  commissioner  inequitable,  then  in  such  proportion  as  the 
commissioner  shall  determine,  such  lands  or  tenements  to  be  benefited  by 
such  work."     11  and  12  Viet.,  chap,  cxii.,  sec.  81.    This  is  quoted  in  the 
Orange  Book  of  the  London  County  Council.    But  the  compiler,  Mr.  Charles 
Harrison,  does  not  always  adequately  distinguish  between  such  cases  and  many 
of  the  other  so-called  precedents,  where  the  matter  of  benefit  is  jurisdictional 
only.    He  may  have  been  led  astray  by  the  Report  of  the  Select  Committee  of 
the  House  of  Lords  on  Conservancy  Boards,  1877,  no.  371,  which  accepted  the 
statement  of  one  of  the  witnesses  of  "  the  principle  introduced  by  the  statute 
of  Henry  VIII.,  and  observed  ever  since,  of  taxing  in  proportion  to  the  bene- 
fit conferred  in  each  particular  case."     See  Report,  vi.     The  statute  of  Henry 
VIII.,  as  we  now  know,  spoke  only  of  a  jurisdictional  benefit. 

As  to  the  later  sewer  acts,  it  has  been  repeatedly  decided  that  "  if  prop- 
erty is  situate  within  the  area  benefited  by  the  sewers,  it  must  contribute 
without  any  reference  to  the  amount  of  benefit  derived."  See  Reg.  vs. 
Head,  3  B.  &  S.  419 ;  32  L.  J.  M.  C.  115  ;  9  Jur.  N.  S.  871 ;  8  L.  T.  708  ;  11 
W.  E.  339.  Cf.  Boyle  and  Davies,  The  Principles  of  Rating  practically  con- 
sidered, 1890,  p.  426. 

2  Lighting  and  Watching  Act  of  1833.    See  also  18  and  19  Viet.,  chap. 
120,  sec.  165. 


THE  BETTERMENT  TAX  349 

into  a  general  class  with  all  others  in  the  same  category,  and 
within  this  category  every  one  pays  according  to  his  ability.1 
This  statutory  requirement,  however,  is  not  observed  ;  and 
the  lighting  and  watching  rates,  like  all  the  other  English 
local  rates,  are  commonly  levied  in  exactly  the  same  manner 
as  the  poor  rate  —  that  is,  according  to  the  ability  of  the 
ratepayer.2  The  same  thing  may  be  said  of  the  sanitary 
rates,  which  are  legally  chargeable  on  agricultural  land,  rail- 
ways, etc.,  at  one-fourth  only  of  the  ratable  value. 

The  English  rates  are  thus  nothing  but  taxes  —  special 
taxes,  it  is  true,  but  levied  according  to  the  principle  of 
all  direct  taxation,  on  faculty  or  ability  to  pay.  Whether 

1  This  is  overlooked  by  Mr.  Harrison  in  his  collection  of  precedents  hi  the 
Orange  Book. 

3  "  All  these  legal  varieties  are  disregarded  in  practice,"  and  the  rates  are 
made  "on  the  same  persons,  on  the  same  basis,  and  by  the  same  scale  as 
the  poor's  rate."  Report  of  the  Poor  Law  Commissioners  on  Local  Taxa- 
tion, pp.  65,  67.  While  this  report  is  exceedingly  valuable  for  its  facts,  it  is 
sometimes  confused  in  its  economics.  Thus  we  find  the  following  passage :  — 

"  For  any  system  of  taxation  to  be  fair,  it  must  bear  a  proportion  both  to 
the  benefit  conferred  upon  the  taxpayers  by  the  expenditure  of  the  tax  and 
to  the  means  which  the  person  possesses  of  paying  the  tax.  It  is,  however, 
in  all  cases  found  to  involve  insuperable  practical  difficulties  to  combine  both 
these  conditions  in  the  imposition  of  a  tax,  and  it  seems  most  usual  to  assume 
that  the  benefit  derived  is  in  proportion  to  the  ability  to  pay,  or  that  the  abil- 
ity to  pay  is  in  proportion  to  the  benefit  derived.  In  most  of  the  local  taxes 
the  ability  to  pay  is  the  standard  of  taxation.  In  some,  however,  where  the 
taxpayer  has  a  definable  share  of  the  benefit  of  the  expenditure,  the  pro- 
portion of  the  benefit  enjoyed  is  made  the  standard  of  taxation.  In  other 
cases  both  principles  are  attempted  to  be  combined."  p.  43. 

As  a  matter  of  fact,  the  only  examples  of  "  benefit "  adduced  by  the  com- 
mission are  the  sewers  rate  and  the  lighting  and  watching  rate.  In  the  for- 
mer the  assessment  by  acreage  is  assumed  by  the  commissioners  to  repre- 
sent the  principle  of  benefit;  the  assessment  according  to  "profitableness," 
the  principle  of  ability.  This  is  a  mistake,  because,  as  we  have  seen, 
taxation  of  land  by  mere  quantity  was  at  one  time  everywhere  the  test  of 
ability.  In  the  lighting  and  watching  rate  "both  principles,"  we  are  told, 
"are  adopted,  though  very  clumsily  and  inadequately."  As  has  been  ex- 
plained, however,  in  the  text,  there  is  no  question  here  of  assessment  accord- 
ing to  special  benefits  to  particular  individuals.  Thus  the  only  examples 
adduced  by  the  commission  admit  of  a  different  interpretation,  and  the  com- 
mission itself  states  "that  the  whole  of  our  local  taxation  is  imposed  either  by 
law,  or  by  usages  regardless  of  the  law,  on  the  same  basis  as  the  poor's  rate." 


350  ESS AyS  IN  TAXATION 

the  local  expenditure  is  defrayed  by  one  general  tax,  as  in 
some  countries,  or  by  a  number  of  special  taxes,  as  in  Eng- 
land, is  immaterial  —  in  each  case  we  are  dealing  with  a 
tax  proper.1 

But  when  we  leave  the  principle  of  ability  —  as  measured 
by  property  or  by  rental  value  or  by  any  other  test  —  and 
come  to  a  payment  which  differs  in  each  particular  case,  and 
which  is  proportioned  to  the  special  or  exclusive  benefit 
accruing  to  the  particular  individual,  it  is  apparent  that 
we  are  dealing  with  a  very  different  kind  of  charge.  In- 
stead of  the  principle  of  faculty,  we  now  have  the  principle 
of  equivalents.  The  charge  is  not  a  rate  or  tax  except  in  the 
wider  sense  that  every  compulsory  charge  levied  by  govern- 
ment may  be  called  a  tax,  because  it  can  be  imposed  only  by  vir- 
tue of  the  power  of  taxation.  As  we  have  seen  above,  how- 
ever, the  taxing  power  may  manifest  itself  in  different  forms ; 
a  local  rate  is  an  example  of  one  form,  a  highway  toll  or  a 
cab  license  fee  of  another,  a  betterment  charge  of  still 
another.  Few  Englishmen  would  say  that  a  highway  toll  or 
a  cab  license  is  a  rate  or  tax ;  yet  a  toll  and  a  tax  differ 
from  each  other  scarcely  more  than  do  a  local  rate  and  a  bet- 
terment charge.  A  local  rate  is  levied  for  the  purposes  of 
the  whole  community  or  of  a  definite  class  of  the  community, 
according  to  the  principle  of  capacity  or  ability  to  pay  ;  a 
highway  toll  or  a  cab  license  fee  or  a  betterment  charge  is 
imposed  on  particular  persons  for  special  benefits  accruing 
to  the  individual,  as  distinct  from  all  other  individuals  in 
the  community. 

Thus  the  problem  is  solved.  A  betterment  charge  (or 
special  assessment)  is  at  once  a  tax  and  not  a  tax.  It 
is  a  tax  in  the  sense  that  all  compulsory  charges  are  taxes, 

1  Professor  Bastable,  Public  Finance,  p.  364,  thus  errs  in  stating  that  the 
English  local  rates  are  "measured  for  each  payer  by  the  benefit  of  the  ser- 
vice," and  that  "  local  taxation  should  be  in  proportion  to  advantage."  In 
Rex  vs.  Mast,  6  T.  R.  154,  the  principle  of  local  taxation  is  laid  down  that 
"  each  inhabitant  should  contribute  according  to  his  ability,  which  is  to  be 
ascertained  by  his  possessions  in  the  parish."  Cf.  also  Boyle  and  Davies, 
op.  cit.,  p.  99. 


THE  BETTERMENT  TAX  351 

because  they  are  imposed  by  the  taxing  power  of  govern- 
ment. But  it  is  not  a  tax  in  the  narrower  and  common 
sense  of  the  term.  It  is  not  a  tax  in  the  sense  that  the 
income  tax  or  the  house  duty  is  a  tax ;  it  is  not  a  tax  in 
the  sense  that  a  local  rate  is  a  tax ;  it  is  just  as  much  or 
as  little  of  a  tax  as  a  marriage  license  fee.  If  we  persist 
in  employing  the  term  tax  for  all  manifestations  of  the 
taxing  power,  it  will  be  necessary  to  coin  a  new  word 
for  taxes  in  the  narrower  sense,  as  distinguished  from 
fees  and  special  assessments.  It  is  the  thing,  not  the  name, 
that  is  important  ;  and  the  confusion  has  arisen  simply 
from  the  fact  that  we  employ  the  same  term,  sometimes 
for  the  one  conception,  sometimes  for  the  other.  Much  trouble 
would  be  avoided  if  the  payment  were  called  simply  a  better- 
ment charge  or  a  special  assessment,  as  opposed  to  a  local 
rate  or  tax.1 

1  The  entire  contention  of  Baumann,  Betterment,  Worsement,  Recoup- 
ment (1894),  p.  36,  in  opposition  to  Mr.  Harrison's  statement  that  better- 
ment in  the  United  States  has  been  decided  not  to  be  taxation,  rests  on  a 
failure  to  observe  the  distinction  made  in  the  text.  "  Special  assessments  " 
may  indeed  be  "  an  exercise  of  the  taxing  power"  ;  and  yet  "betterment" 
is  not  necessarily  the  same  thing  as  "taxation."  So  also  Mr.  Baumann's 
criticism  of  Mr.  Cripps'  distinction  (pp.  39-40)  rests  on  a  complete  miscon- 
ception. 

This  is  a  convenient  place  to  call  attention  to  the  errors  in  Mr.  Baumann's 
earlier  book,  Betterment  (1893).  He  entirely  misunderstands  Judge  Cooley 
in  imagining  that  that  author  condemns  the  practice  of  estimating  the  bene- 
fits accruing  to  each  lot  separately.  As  Mr.  Rosewater  points  out  in  the 
Political  Science  Quarterly,  viii.,  p.  764,  what  Judge  Cooley  really  disap- 
proves, and  what  is  now  quite  generally  held  to  be  unconstitutional,  is  the 
practice  of  charging  upon  the  abutting  owner  the  cost  of  the  particular  im- 
provement in  front  of  his  lot  only,  without  reference  to  the  benefits  along 
the  whole  line  of  the  work  —  in  fact,  without  apportionment.  From  this 
misconception,  Mr.  Baumann  has  fallen  into  grievous  error.  He  also  fails 
to  distinguish  the  safeguards  thrown  about  the  exercise  of  eminent  domain 
in  the  American  commonwealths  from  the  procedure  required  in  levying 
special  assessments.  It  is,  in  most  cases,  merely  an  accident  that  the  pro- 
ceedings for  the  two  operations  happen  to  be  joined  together. 

There  are  many  other  mistakes  in  the  volume,  as,  for  instance,  the  state- 
ment that  special  assessments  are  unconstitutional  in  Minnesota  (p.  76)  ;  that 
their  constitutionality  is  still  doubtful  in  Illinois  (p.  76) ;  that  Adam  Smith  lays 
down  value  as  the  only  standard  by  which  taxes  can  be  apportioned  (p.  81) ;  and 


352  ESSAYS  IN  TAXATION" 

III.    The  Principle. 

The  theory  of  the  betterment  charge  or  assessment  ac- 
cording to  benefits  is  very  simple.  It  rests  upon  the  almost 
axiomatic  principle  that  if  the  government  by  some  positive 
action  confers  upon  an  individual  a  particular  measurable 
advantage,  it  is  only  fair  to  the  community  that  he  should 
pay  for  it.  The  facts  may  be  in  question,  for  it  may  happen 
that  the  particular  advantage  is  only  ostensible,  or  that  the 
special  benefit  is  not  measurable.  But  the  facts  being  given, 
the  principle  seems  self-evident. 

In  our  discussion  of  the  single  tax,  it  was  pointed  out 
that  there  is  a  distinction  between  unearned  increment 
in  general  and  the  betterment  principle  in  particular.  The 
single  tax  on  land  values  was  found  to  be  inequitable  because 
benefit  is  not  the  general  principle  of  taxation,  and  because, 
even  if  it  were,  it  would  not  mean  a  single  tax.  The  benefits 
of  general  governmental  action  are  quantitatively  unmeas- 
urable ;  we  do  not  by  paying  taxes  purchase  a  definite  amount 
of  advantages  from  the  government  as  we  buy  a  certain 
quantity  of  tea  from  the  grocer.  But  if  the  government 
performs  some  special  service  for  us,  there  is  no  reason 
why  the  public  at  large  should  pay  for  it :  to  the  extent 
that  the  community  as  a  whole  is  interested  in  the  service, 
it  is  proper  that  it  should  contribute  to  the  expense.  If 
it  is  wholly  a  matter  of  common  interest,  the  community 
should  pay  all ;  if  it  is  wholly  a  matter  of  individual  benefit, 
the  individual  should  pay  all ;  if  it  is  partly  common 
and  partly  individual,  the  cost  should  be  divided  and  the 
individual  should  pay  up  to  the  amount  of  his  measurable 
special  benefit.  In  the  one  case,  the  expense  is  met  by 
a  tax  or  rate ;  in  the  second,  by  a  fee  or  toll,  or  by  a 
special  assessment  or  betterment  charge;  in  the  third,  by  a 
combination  of  both  methods.  To  object  to  a  betterment 

that  American  judges  allow  special  assessments  for  benefit  with  reluctance 
(p.  100).  On  p.  80  we  find  the  same  confusion  as  that  alluded  to  above  in 
the  later  work.  Most  of  the  objections  in  this  later  book  are  too  frivolous 
to  deserve  any  reply. 


THE  BETTERMENT  TAX  353 

charge  because  it  is  not  levied  according  to  the  principle  of 
ability  to  pay  is  as  illogical  as  to  object  to  a  tax  because  it  is 
not  levied  according  to  the  special  advantage  derived.  We 
must  not  apply  to  one  principle  of  public  contribution  the 
test  peculiar  to  another  principle. 

When,  therefore,  the  local  government  performs  a  defi- 
nite act  and  makes  a  definite  expenditure  the  result  of 
which  is  a  clear  and  measurable  accretion  to  the  value 
of  some  particular  piece  of  property,  every  consideration  of 
logic  and  justice  demands  a  special  contribution  by  the 
owner  to  defray  this  expenditure. 

As  a  principle,  this  is  really  no  longer  debatable.  Even 
so  conservative  a  body  as  the  Committee  of  the  English 
House  of  Lords,  after  hearing  all  the  arguments  in  opposi- 
tion, has  recently  coine  to  the  conclusion  that  — 

The  principle  of  betterment  —  in  other  words,  the  principle 
that  persons  whose  property  has  clearly  been  increased  in  market 
value  by  an  improvement  effected  by  local  authorities  should 
specially  contribute  to  the  cost  of  the  improvement  —  is  not  in 
itself  unjust,  and  such  persons  can  equitably  be  required  to  do  so.1 

This  concession  practically  marks  the  close  of  the  contest 
on  the  question  of  principle,  in  England.  The  methods  of 
carrying  out  the  principle  are  indeed  debatable ;  but  in  its 
broad  lines,  the  theory  is  now  accepted  in  the  chief  quarter 
where  opposition  could  be  expected.2 

1  Report  of  the  Select  Committee  on  Town  Improvements,  1894,  p.  iii. 

2  The  legislative  history  of  betterment  in  England  is  interesting.     The 
first  bill  was  the  Strand  Improvement  bill  of  1890,  in  which  the  betterment 
provisions  inserted  by  the  London  County   Council,  and  adopted  in  the 
chairman's  draft  report,  were  struck  out  by  the  Select  Committee  of  the 
House  of  Commons.    The  next  was  the  Cromwell  Road  Bridge  bill  of  1892,  in 
which  the  betterment  clause  was  struck  out  by  the  committee  by  a  majority  of 
one.    Then  came  the  London  Improvements  bill  of  1893,  providing  for  a  new 
central  street  from  the  Strand  to  Holborn.     This  passed  the  House  of  Com- 
mons but  was  defeated  in  the  House  of  Lords'  committee.     Finally  came 
the  Tower  Bridge  Southern  Approach  bill  of  1894,  which  after  various  muta- 
tions was  approved  by  the  House  of  Lords'  committee,  and  became  law  in 
1895,  as  58  and  59  Viet.,  ch.  cxxx.     In  this  act  the  payment  is  termed  an 
"improvement  charge." 

2  A 


354  ESS  AYS  IN  TAXATION 

A  subject  much  discussed  in  connection  with  betterment 
is  that  of  "worsement."  If  an  individual  has  to  pay  for  a 
benefit,  it  was  claimed  that  his  neighbor  should  be  recom- 
pensed for  damages  to  his  property,  caused  by  a  public  im- 
provement. The  committee,  however,  decided  that  injury  to 
property  was  to  be  taken  into  account  only  when  a  betterment 
charge  was  imposed  upon  the  same  owner  for  benefits  accru- 
ing to  his  property  in  the  immediate  neighborhood,  by  the 
very  same  improvement.  Further  than  this  it  was  unwilling 
to  go.  As  it  has  been  well  said,  it  is  nothing  less  than  a 
grotesque  absurdity  to  suggest  the  creation  of  new  vested 
interests  in  the  perpetuation  of  such  public  evils  as  over- 
crowded and  insanitary  slums  and  in  circuitous  modes  of 
communication.1  In  the  Tower  Bridge  Act  of  1895,  as  well 
as  in  the  Standing  Orders  of  the  House  of  Lords  adopted  in 
July,  1895,  the  legitimacy  of  "  worsement "  has  been  recog- 
nized, but  only  within  the  above  very  narrow  limits. 

A  plan  sometimes  urged  as  calculated  to  attain  the 
same  results  as  the  betterment  system  is  that  of  "  recoup- 
ment." It  has  occurred  that  in  making  an  improvement  the 
municipal  government  or  other  public  body  has  taken  more 
land  than  was  actually  necessary,  and  after  the  execution  of 
the  work  has  sold  the  land  at  a  higher  price,  thus  retain- 
ing for  the  community  the  increment  in  value.  It  was  shown 
by  the  testimony  before  the  Lords'  committee  that,  as  a  mat- 
ter of  fact,  these  transactions  had  generally  resulted  in  loss 
rather  than  in  gain  ;  but  it  was  claimed  that  this  was  due  in 
large  part  to  certain  defects  in  the  law.  The  committee  re- 
ported itself  "  as  not  satisfied  that  it  has  ever  been  tried  under 
circumstances  calculated  to  make  it  successful."  2  In  England 
there  is  perhaps  no  objection  to  trying  this  experiment  on  a 
larger  scale ;  but  in  the  democratic  municipalities  of  America 

1  G.  H.  Blunden,  Local  Taxation  and  Finance,  1895,  p.  95. 

2  "No  sufficient  power  has  ever  yet  been  given  to  the  local  authorities  to 
become  possessed  of  the  improved  properties  without  buying  out  all  the 
trade  interests — a  course  which  is  inevitably  attended  with  wasteful  and 
extravagant  expenditure."    Report,  no.  10  (of  recommendations). 


THE  BETTERMENT  TAX  355 

it  is  questionable  whether  good  results  could  be  expected 
from  the  scheme,  even  if — as  seems  uncertain — it  were  con- 
stitutionally valid. 

It  is  evident,  however,  that  the  real  difficulty  with  better- 
ment lies  in  the  details  of  its  execution.  In  the  United 
States,  where  the  system  has  for  a  long  time  been  thor- 
oughly at  home,  it  has  been  deemed  sufficient  to  approxi- 
mate roughly  to  the  benefits  conferred.  In  no  department 
of  public  contribution  is  it  ever  possible  to  gauge  with 
precision  the  exact  relation  of  the  individual  to  the  public 
purse.  With  special  assessments,  as  with  other  operations  of 
public  finance,  the  best  that  governments  can  do  is  to  reach 
substantial  justice.  The  decision  is  left  to  the  legally  con- 
stituted authorities,  and  the  assumed  benefit,  which  is  to 
guide  the  authorities  in  their  decision,  is  not  always  neces- 
sarily the  exact  actual  benefit,  a  fair  approximation  to  the 
real  benefit  being  now  considered  adequate  for  practical  pur- 
poses. This  result,  however,  has  been  reached  only  after 
considerable  experience. 

In  England,  on  the  other  hand,  where  the  principle  is 
about  to  be  introduced,  far  more  solicitude  is  shown,  because 
the  opposition  of  the  vested  interests  is  naturally  stronger. 
The  committee  recommends  certain  rules,  most  of  which 
have  been  incorporated  into  the  Tower  Bridge  Act  of  1895, 
which  are  intended  to  limit  the  charge  to  the  amount  of 
actual  benefit,  and  to  protect  the  owner  against  any  possible 
abuse  of  the  system.  He  must  be  notified  not  only  of  the 
proposed  charge  before  the  commencement  of  the  projected 
improvement,  but  also  of  the  alleged  increase  in  the  value 
of  his  property  within  some  reasonable  period  after  the  com- 
pletion of  the  work.1  Furthermore,  if  the  owner  objects, 
the  matter  is  to  be  decided  by  an  arbitrator  or  a  jury,  the 

1  "  The  period  should  not  be  so  short  that  the  effect  of  the  improvement 
could  not  be  adequately  tested,  and  it  should  not  be  so  long  as  to  make  the 
property  intended  to  be  charged  suffer  in  its  market  value  by  the  suspension 
of  the  decision  as  to  the  charge."  Report,  no.  8.  In  the  Act  of  1896  the 
limits  are  twelve  months  and  three  years.  68  and  69  Viet.,  ch.  crrx. 
sec.  36  (4). 


356  ESSAYS  IN  TAXATION" 

costs  being  borne  in  general  by  the  local  authority.  Finally, 
if  the  owner  still  thinks  that  the  charge  exceeds  the  enhance- 
ment of  value  to  his  property,  he  may  demand  that  the  local 
authority  purchase  the  property  at  its  market  value.1 

These  provisions  are  interesting,  the  last  being  almost  iden- 
tical with  the  provisions  of  the  recent  New  Zealand  law 
explained  in  another  chapter.  In  New  Zealand,  it  is  applied 
to  progressive  taxation  ;  in  England,  it  is  recommended  for 
the  betterment  charge.  In  each  case  it  is  simply  a  protec- 
tion of  the  individual  against  arbitrary  administrative  action. 
The  other  provision  as  to  costs  seems  to  be  a  little  unfair  to 
the  government,  as  it  puts  a  premium  on  litigation  and  is 
calculated  to  interfere  with  the  prompt  completion  of  the 
work.  All  these  points  are,  however,  matters  of  detail  which 
can  easily  be  adjusted. 

The  benefit  principle,  even  though  it  is  not  applicable  to 
taxation  proper,  has  thus  its  undoubted  place  in  the  sphere  of 
local  revenue.  That  it  is  liable  to  abuse  may  be  conceded  ;2 
but  so  is  the  principle  of  ability  to  pay.  Taxes,  like  special 
assessments,  have  not  always  been  levied  with  perfect  fair- 
ness ;  but  the  departure  from  fairness  must  in  these  two 
cases  be  measured  by  entirely  different  standards.  The 
system  of  special  assessments,  as  has  already  been  pointed 
out,3  embodies  the  kernel  of  truth  in  the  unearned  incre- 
ment doctrine.  Dr.  Rosewater  puts  the  point  admirably 
as  follows  : 4  — 

Special  assessment  undoubtedly  transforms  a  certain  part  of  the 
enhancement  of  land  values  from  an  unearned  increment  into  an 

1  Report,  no.  7.    The  clause  as  adopted  in  the  Act  of  1896,  sec.  36  (9),  pro- 
vides that  the  option  of  selling  must  be  exercised  before  the  arbitration. 

2  For  a  history  of  these  abuses,  see  Rosewater,  Special  Assessments,  chap, 
iii. ;  also  ibid.,  pp.  142-144. 

8  George  A.  Black,  The  History  of  the  Municipal  Ownership  of  Land  on 
Manhattan  Island,  p.  78.  Columbia  College  Studies  in  History,  Economics 
and  Public  Law,  vol.  i. ,  no.  3. 

4  Rosewater,  Special  Assessments,  p.  140.  Cf.  the  articles  on  "The  Bet- 
terment Tax,"  by  the  Duke  of  Argyll  and  by  John  Rae,  in  Contemporary 
Iteview,  vols.  Ivii.  and  Iviii. 


THE  BETTERMENT  TAX  357 

earned  increment.  It  does  this  at  the  very  time  that  the  benefit 
arises,  thus  avoiding  every  taint  of  confiscation  of  vested  interests. 
Through  it  may  be  secured  the  chief  advantages  of  the  appro- 
priation of  the  future  unearned  increment,  without  destroying  the 
healthful  stimulus  arising  from  the  private  ownership  of  landed 
property.  The  total  increase  is  seldom  appropriated,  but  only  so 
much  as  is  required  to  defray  that  share  of  the  cost  of  the  par- 
ticular improvement  which  may  represent  the  special  benefit  con- 
ferred. We  have  here  no  uncharitable  begrudging  of  all  rise  in 
value  due  to  conditions  other  than  those  created  by  the  party  who 
reaps  the  advantage.  All  that  is  demanded  is  that  when  a  person 
secures  an  enrichment  to  his  estate,  and  the  expense,  if  not  borne 
by  him,  must  be  borne  by  some  one,  —  in  this  instance,  the  tax- 
paying  public  —  he  shall  make  compensation  therefor.  This  is 
the  true  equitable  principle.  The  contributor  pays  not  alone 
because  he  obtains  a  benefit,  but  because  that  benefit  is  joined  to 
an  expense  the  burden  of  which  finds  a  fitter  resting  place  upon 
his  shoulders,  than  upon  the  shoulders  of  others  not  specially 
benefited. 

In  the  United  States  the  betterment  principle  has  long 
been  firmly  rooted  in  the  revenue  system ;  and  although 
there  may  be  particular  cases  in  which  it  has  not  worked 
well,  the  evidence  of  experience  and  the  popular  verdict  as 
to  the  methods  employed  are  overwhelmingly  in  its  favor. 
On  the  continent  of  Europe  the  system  is  now  fast  spreading 
because  of  the  growing  importance  of  municipal  finance 
and  of  the  more  careful  analysis  of  its  underlying  principles. 
England,  which  has  taken  the  lead  in  the  reform  of  the 
national  fiscal  system,  cannot  afford  much  longer  to  lag 
behind  in  the  movement  for  the  just  distribution  of  local 
burdens.  Without  the  application  of  the  betterment  prin- 
ciple, such  justice  can  scarcely  be  secured. 


CHAPTER  XII. 

RECENT  EUROPEAN  LITERATURE  IN  TAXATION. 

IN  some  respects  the  most  significant  fact  of  the  recent 
development  of  economic  thought  is  its  growing  international 
character.  Not  only  does  the  modern  economist  find  it  neces- 
sary to  draw  his  facts  from  a  wider  field  than  that  of  his  own 
country;  but  if  he  desires  to  keep  abreast  of  the  advances 
in  theory  he  also  finds  it  incumbent  on  him  to  read  many 
languages  and  to  note  the  movements  in  widely  distant 
countries.  In  no  domain  is  this  more  true  than  in  the 
science  of  finance.  In  the  following  pages  an  attempt  will 
be  made  to  run  hurriedly  over  the  productions  of  the  last 
decade  and  in  a  general  way  to  outline  their  value  to  the 
English  speaking  student. 

I.  Germany. 

There  are  two  methods  of  writing  economic  works.  One 
is  essentially  historical  and  descriptive,  giving  an  account 
of  the  past  and  of  the  actual  state  of  legislation  and  of 
methods,  and  attempting  to  draw  therefrom  a  statement  of  the 
underlying  principles  ;  the  other  is  primarily  abstract  and 
deductive,  making  little  use  of  history  and  of  facts,  but  en- 
deavoring to  reach  conclusions  from  well-defined  principles. 
The  modern  German  writers  on  the  science  of  finance  have 
for  some  time  devoted  themselves  almost  exclusively  to  the 
first  method;  but  very  recently  a  partial  revulsion  of  feel- 
ing has  been  indicated  by  the  appearance  of  several  works 
which  attempt  to  avoid  the  exaggerations  of  the  extreme 
historical  school,  and  to  take  refuge  once  again  in  purely 

358 


RECENT  EUROPEAN  LITERATURE  359 

theoretic  discussion.  For  Germany,  this  is  probably  a  salu- 
tary reaction,  because  of  the  comparative  discredit  into 
which  pure  theory  had  fallen. 

The  Handbook  of  the  Science  of  Finance  by  Professor 
Umpf enbach *  is,  strictly  speaking,  not  a  new  work.  But  as 
the  first  edition  appeared  about  a  quarter  of  a  century  ago, 
and  as  some  notable  additions  have  been  made  to  the  present 
volume,  it  may  be  discussed  as  practically  a  new  publica- 
tion. The  first  edition  was  published  just  before  the  cur- 
rent toward  historical  economics  had  set  in  strongly  ;  the 
second  edition  appears  just  after  the  tide  has  begun  to  ebb. 
There  are  hence  almost  no  vestiges  of  the  inductive  treat- 
ment. In  fact,  the  strong  points  of  the  work  are  the  rigor  of 
the  theoretic  discussions  and  the  precision  of  the  definitions. 

The  general  tone  of  the  book  is  conservative.  The  author 
opposes  the  further  industrial  activity  of  the  state,  even  in 
such  domains  as  that  of  railroads  ;  he  has  nothing  but  ridi- 
cule for  the  idea  of  the  income  tax  in  practical  life ;  he 
declares  that  the  question  of  progression  does  not  belong  to 
the  science  of  finance  at  all,  because  it  involves  communistic 
changes  of  property.  These  contentions  are  interesting  as 
giving  the  work  the  characteristics  of  the  French  rather  than 
of  the  modern  German  authorities.  It  is  very  doubtful,  how- 
however,  whether  they  will  exert  any  influence  on  German 
practice. 

A  more  important  point  in  Umpfenbach's  book  is  method- 
ology. The  common  division  of  public  revenues  by  French 
writers  like  Leroy-Beaulieu  is  into  domains,  industrial  under- 
takings and  taxes,  corresponding  to  Adam  Smith's  old  divi- 
sion into  revenue  from  public  lands,  from  public  stock 
and  from  taxes.  The  German  writers,  on  the  other  hand, 
early  saw  this  division  to  be  inadequate  and,  as  we  know, 
added  another  category,  fees.  The  exact  definition  of 
fees,  however,  has  always  been  a  mooted  point ;  and  few 

1  Lehrbuch  der  Finanzwissenschaft.  Von  Dr.  Karl  Umpfenbach,  o.  6. 
Professor  der  Staatswissenschaften  an  der  Universitat  Konigsberg.  Zweite 
Auflage.  Stuttgart,  Ferdinand  Enke,  1887.  —  8vo,  xii.,  517  pp. 


360  ESSAYS  IN  TAXATION 

writers  agree  exactly  on  the  distinction  between  fees 
and  taxes.  Umpfenbach  defines  fees  as  "special. payments 
for  the  cost  of  a  financial  transaction,  in  so  far  as  it  is 
necessary  for  political  purposes,  and  in  so  far  as  the  expenses 
surpass  those  which  it  would  be  permissible  to  lay  on  the 
community  as  such."  Passing  over  the  minor  infelicities  of 
expression,  we  may  say  that  at  all  events  it  conveys  a  precise 
meaning. 

Had  Umpfenbach  rested  here,  his  book  would  have  ren- 
dered a  substantial  service  to  the  clearing  up  of  ideas.  But 
he  adds  to  his  three  categories  of  fees,  taxes  and  domains 
a  fourth  category  of  fiscal  (or  lucrative)  prerogatives,  which 
are  defined  as  "  compulsorily  reserved,  exclusive  rights  of  the 
state  over  specified  kinds  of  property  rights."  The  founda- 
tion of  this  fourth  category  is  to  be  found  in  the  mediseval 
regalia ;  but  Umpfenbach  makes  it  now  include  such  widely 
diverse  revenues  as  the  poll  tax,  taxes  on  communication, 
on  the  transfer  of  property,  on  legacies  and  successions,  rev- 
enue from  treasure-trove,  from  mines,  salt,  tobacco,  spirits 
and  bank  monopolies,  and  finally  from  licenses.  He  lays  great 
emphasis  on  this  division  ;  in  fact,  it  is  the  thread  which 
runs  through  the  whole  work.  But  the  only  result  of  its 
adoption  would  be  undue  restriction  of  the  field  of  taxation, 
and  an  increased  confusion  as  to  the  exact  nature  of  taxes. 
What  he  gains  by  the  separation  of  fees  from  taxes,  he  loses 
by  the  separation  of  taxes  from  fiscal  prerogatives.  His 
methodological  explanation  will  not,  on  the  whole,  commend 
itself  to  students  of  finance. 

Much  the  same  class  of  questions  is  treated  by  Professor 
Neumann  in  his  work  entitled  Taxation.^  Neumann  is  well 
known  as  one  of  the  prominent  modern  writers  on  finance. 
His  book  on  Die  progressive  JEinkommensteuer  remains  one 
of  the  best  works  on  that  knotty  subject;  and  in  that,  as  in  all 

1  Die  Steuer.  Erster  Band.  Die  Steuer  und  das  offentliche  Interesse. 
Eine  Untersuchung  fiber  das  Wesen  der  Steuer  und  die  Gliederung  der 
Staats-  und  Gemeinde-Einnahmen.  Von  Fr.  J.  Neumann.  Leipzig,  Duncker 
und  Humblot,  1887.  —  Small  8vo,  ix.,  562  pp. 


RECENT  EUROPEAN  LITERATURE  361 

his  earlier  writings,  is  to  be  found  a  rich  fund  of  historical 
and  statistical  information.  In  this  newer  work,  however, 
Neumann  has  undertaken  to  analyse  in  detail  the  nature  of 
taxation.  The  first  volume,  the  only  one  that  has  yet  appeared, 
is  introductory  and  to  a  great  extent  methodological.  The 
twelve  chapters  treat  mainly  of  four  topics  :  classification 
of  public  revenues,  fees  versus  taxes,  the  principle  of  public 
interest,  and  direct  versus  indirect  taxes.  In  the  discussion 
of  these  points  the  author  shows  great  acuteness  and  dialectic 
skill;  yet  three  criticisms  can  be  made.  The  discussion  is  too 
minute,  and  often  borders  on  the  wearisome  ;  the  style  is 
anything  but  clear  ;  and  the  conclusions  are  not  advanced 
with  the  necessary  precision. 

After  criticising  the  usual  method  of  classification,  Neu- 
mann defines  fees  as  payments  for  special  services  of  the  state 
or  the  community,  so  far,  but  only  so  far,  as  the  public  interest 
is  involved.  This  would  include  the  tolls  of  roads,  canals, 
railways  and  telegraphs,  but  would  exclude  the  revenues 
from  fiscal  monopolies.  He  devotes  over  two  hundred  pages 
to  the  discussion  of  public  interest,  and  finally  defines  it,  but 
in  so  characteristic  a  manner  that  it  must  be  given  in  the 
original  :  — 

Oeffentliches  Interesse  im  (objectiven)  engeren  Sinne  ist  ein  auf 
menschliche  Handlungen  oder  Werke  beziigliches  Interesse  von 
Zielen  oder  Zwecken  so  grosser  Bedeutung,  dass  um  ihretwillen 
eine  Auferlegung  von  Opfern  nach  herrschender  Annahme  ge- 
rechtf ertigt  ist. 

In  other  words,  two  hundred  pages  are  devoted  to  proving 
that  a  "  public  interest  is  an  interest  of  such  importance  as  to 
justify  a  sacrifice  on  the  part  of  the  individual."  This  might 
surely  have  been  shown  in  less  than  two  hundred  pages,  and 
without  the  formidable  array  of  proofs  and  counter-proofs, 
of  exceptions  and  sub-exceptions,  which  fairly  crowd  the  book 
and  bewilder  the  reader.  To  be  over-exact  is  often  as  great 
a  mistake  as  to  be  superficial,  for  either  excess  is  apt  to  result 
in  confusion. 


362  ESS AyS  IN  TAXATION' 

Much  better  is  his  discussion  of  the  four  methods  of 
classifying  direct  and  indirect  taxes.  Neumann  finally  allies 
himself  to  Parieu's  method,  making  the  distinction  depend 
on  the  permanence  or  periodicity  of  the  act.  Other  parts 
of  the  book  also  will  prove  suggestive,  as,  for  instance, 
his  discussion  of  the  relation  between  taxes  and  prices  ;  but 
it  might  well  have  been  boiled  down  to  one-fifth  of  its  present 
compass.  Questions  of  methodology  are  not  the  all-absorbing 
ones. 

The  same  criticism  can  certainly  not  be  urged  in  the  case 
of  the  last  volume  of  Wagner's  Science  of  Finance.1  The 
first  volumes  of  this  great  work  are  familiar  to  all  students. 
Wagner  started  out  almost  two  decades  ago  with  the  idea  of 
publishing  a  new  edition  of  Rau's  finance,  but  soon  found 
his  differences  from  Rau  to  be  so  great  as  to  call  for  a  new 
creation,  instead  of  a  new  edition.  The  first  two  volumes  of 
the  work  appeared  years  ago  —  the  second  in  1880.  This 
third  volume  deals  not  with  general  theory,  but  with  special 
questions  in  the  history  and  practice  of  taxation.  Unfortu- 
nately Wagner's  plan  was  so  comprehensive,  and  his  method 
so  productive  of  repetition,  as  to  make  the  completion  of  the 
work  doubtful.  In  fact,  as  it  progressed,  Wagner  entered 
into  continually  greater  details  which  would  have  been  in 
place  only  in  a  cyclopaedia.  The  consequence  is  that  it  has 
taken  him  ten  years  to  write  the  third  volume,  and  that  he 
has  been  able  to  discuss  the  present  condition  of  French  and 
English  taxation  only.  Wagner  himself  seems  to  have  tired 
of  this  minute  method  and  now  intimates  that  he  can 
scarcely  foresee  the  time  when  the  work  will  be  finished. 
This  is  the  more  to  be  regretted  because  the  systems  of 
France  and  of  England  have  already  been  made  familiar  to 
us  by  other  good  publications,  while  the  condition  of  the  re- 

1  Finamwissenschaft.  Von  Adolf  Wagner.  Dritter  Theil :  Spedelle 
Steuerlehre.  —  Uebersicht  der  Steuergeschichte  wichtigerer  Staaten  und  Zeit- 
alter  bis  Ende  des  18.  Jahrhunderts. — Die  Besteuerung  des  19.  Jahrhun- 
derts.  Einleitung :  Britische  und  franzosische  Besteuerung.  Leipzig,  Win- 
ter'sohe  Verlagshandlung,  1889.  — 8vo,  xxxi.,  916  pp. 


RECENT  EUROPEAN  LITERATURE  363 

maining  countries,  which  he  has  not  yet  fully  treated,  is  far 
from  being  equally  well  known.  It  is  to  be  hoped  that  the 
work  will  not  be  left  a  torso.  The  present  volume  requires 
no  especial  commentary  beyond  the  statement  that  in  all  his 
details  of  the  history  and  practice  of  taxation,  as  well  as  in 
his  general  summaries  of  the  French  and  English  systems, 
Wagner  remains  true  to  the  ideas  advanced  in  the  former  vol- 
umes. He  has  continually  in  mind  the  demands  of  what  he 
calls  the  socio-political  principles  —  the  principles  whereby 
the  government  is  looked  up  to  as  the  regulator  of  the  distri- 
bution of  wealth,  and  taxation  is  regarded  as  an  engine  to 
redress  inequalities  of  fortune.  Much  as  we  may  dissent  from 
the  fundamental  points  of  Wagner's  general  position,  it  must 
be  conceded  that  he  has  developed  his  doctrines  with  consum- 
mate keenness  and  phenomenal  learning,  and  that  his  Science 
of  Finance,  even  though  incomplete,  still  stands  at  the  head 
of  financial  literature  for  the  suggestiveness  of  its  views  and 
the  wealth  of  its  contents. 

Professor  Cohn's  Science  of  Finance1  is  constructed  on  an 
entirely  different  method.  It  forms  the  second  volume  of 
the  general  System  of  Political  Economy,  the  opening  volume 
of  which  was  published  several  years  before.  After  a  gen- 
eral introduction  on  the  nature  and  history  of  the  science  of 
finance,  the  first  book  treats  of  the  essence  of  government 
economy  or  of  the  public  household,  dealing  with  public 
functions,  public  expenditures,  the  history  and  development 
of  public  revenue,  and  the  budget.  The  second  book  dis- 
cusses the  principles,  history  and  actual  systems  of  taxation. 
The  third  book  is  devoted  to  a  presentation  of  German 
taxation.  Finally,  a  fourth  book  treats  of  public  credit. 

The  chief  interest  of  the  work  lies  in  the  first  book  and  in 
the  first  chapter  of  the  second  book.  The  remainder  of  the 

1  System  der  Finanzwissenschaft.  Ein  Lesebuch  fur  Studierende.  Von 
Gustav  Cohn,  ord.  Prof,  der  Staatswissenschaften  an  der  Universitat  Got- 
tingen.  Stuttgart,  Ferdinand  Enke,  1889.  —  8vo,  x.,  804  pp. 

The  Science  of  Finance.  By  Gustav  Cohn.  Translated  by  T.  B.  Veblen. 
Chicago,  1895.  —  8vo,  xi.,  800  pp. 


364  ESSAYS  IN  TAXATION 

volume  is  always  interesting,  as  are  all  of  Cohn's  writings, 
but  it  contains  nothing  that  can  be  called  a  real  contribu- 
tion to  financial  science.  He  is  indeed,  through  his  intimate 
acquaintance  with  Swiss  financial  methods,  often  enabled  to 
illustrate  certain  principles  more  successfully  than  any  of  his 
predecessors,  but  in  the  main  he  follows  the  rather  conserva- 
tive lines  of  accepted  views.  The  book  on  German  taxation 
gives  an  excellent  picture  of  the  present  situation,  but  is 
omitted  in  the  translation.  The  chapters  on  public  credit 
contain  an  admirable  historical  survey,  but  in  matter  of 
principle  do  not  afford  anything  which  cannot  be  found  at 
least  equally  well  said  in  Professor  Adams'  work. 

It  is  otherwise  with  the  discussion  of  the  general  princi- 
ples of  finance ;  for  Cohn's  treatment  of  the  various  kinds  of 
public  contributions  marks  a  distinct  advance.  His  classi- 
fication of  public  revenues,  although  not  completely  satis- 
factory, is  based  upon  an  analysis  of  comparative  private  and 
public  benefits,  and  is  elucidated  by  some  suggestive  remarks. 
His  description  of  the  historical  development  of  public  econ- 
omy is  clearer  than  that  of  Roscher,  and  traces  the  chief  lines 
of  development  with  a  master-hand.  His  short  discussion 
of  the  principles  of  local  finance  is  especially  welcome  when 
compared  to  the  laborious  and  confused  chapters  to  be  found 
in  other  treatises. 

Most  striking  is  his  treatment  of  the  equities  of  taxation. 
Cohn  shows  that  just  as  the  accepted  ideas  of  justice  are  a 
product  of  historical  evolution,  so  the  conception  of  just 
taxation  has  assumed  a  different  form  in  every  stage  of 
human  progress.  He  gives  a  sketch  of  the  different  ideas 
that  swayed  the  public  mind  at  various  epochs,  and  then 
devotes  himself  in  particular  to  a  consideration  of  progres- 
sive taxation.  The  result  of  the  discussion  is  the  adoption 
of  the  principle  of  progression,  not  for  Wagner's  socio- 
political reasons,  but  simply  because  under  modern  con- 
ditions proportional  taxation  no  longer  corresponds  to 
taxable  capacity.  Cohn  seeks  to  define  and  to  limit 
the  principles  of  progression,  and  in  connection  with  this 


RECENT  EUROPEAN  LITERATURE  365 

gives  a  good  history  of  the  doctrine  of  the  "minimum 
of  subsistence." 

Weak  points  are  not  lacking,  as,  for  instance,  in  his  dis- 
cussion of  the  incidence  of  taxation.  Here,  as  in  many  other 
places,  Cohn  conceals  the  difficulties  of  the  problem  by  the 
brilliancy  of  his  style.  As  this  brilliancy  is  entirely  absent 
in  the  translation,  the  work  will  probably  not  receive  so 
favorable  a  reception  in  its  English  dress  as  it  did  in  the 
original.  It  will  have  served  our  purpose,  however,  to  call 
attention  to  the  points  in  which  Cohn's  book  marks  an 
advance  on  its  predecessors.  Wagner,  Roscher  and  Cohn 
supplement  one  another.  Wagner  is  more  radical  and 
audacious  in  his  suggestions  and  illustrates  his  theories  by 
a  wealth  of  statistical  material ;  Roscher  is  weak  in  theory 
but  strong  in  history  ;  Cohn  seeks  to  keep  the  golden 
mean.  Cohn's  finance  is  superior  to  all  others  in  two 
respects,  —  in  clearness  of  style  and  in  philosophic  breadth 
of  view.  We  welcome  this  new  accession  to  economic  litera- 
ture as  one  of  the  most  important  works  of  the  decade,  but 
very  much  fear  that  it  will  help  the  American  student  to 
only  a  slight  extent. 

The  most  recent  text-book  is  by  Dr.  Vocke.  As  this  is, 
however,  in  some  respects  simply  the  elaboration  of  an  earlier 
work,  we  shall  devote  a  few  words  to  its  predecessor.  In  this 
former  work,  entitled  Contributions,  Imposts  and  Taxes,1  Dr. 
Vocke  treats  the  subject  in  a  somewhat  peculiar  way. 
After  having  won  his  spurs  over  a  quarter  of  a  century 
ago  by  his  History  of  English  Taxation,  at  that  time  the 
most  meritorious  work  on  the  topic,  the  venerable  doctor 
here  attempts  to  find  the  moral  basis  and  relative  justifica- 
tion of  the  various  taxes.  The  problem  which  he  sets  out 
to  solve  is  that  of  the  exact  difference  between  direct  and 
indirect  taxation ;  and  the  conclusion  to  which  he  comes  is 
at  all  events  novel.  In  an  introductory  book  he  traces  the 

1  Die  Abgaben,  Auflagen  und  die  Steuer,  vom  Standpunkte  der  Geschichte 
und  der  Sittlichkeit.  Von  Dr.  Wilhelm  Vocke,  geheimer  Oberrechnungsrat 
Stuttgart,  J.  G.  Cotta,  1887.  — Large  8vo,  xxvi.,  625  pp. 


366  ESSAYS  IN  TAXATION 

literary  doctrine  of  the  basis  of  taxation  in  general,  and 
divides  the  authors  into  three  schools :  the  representatives 
of  the  contract  or  protection  doctrine,  including  most  of 
the  earlier  English  and  French  works  ;  the  group  which 
emphasizes  the  sovereign  nature  of  the  state  and  the  duties 
of  the  subject,  but  without  any  deeper  historical  insight ; 
and  finally  the  socio-political  writers  who,  like  Held,  Schaffle 
and  Wagner,  attribute  to  the  state  a  compensatory  duty  in 
taxing  away  inequalities  of  fortune.  Vocke  strongly  objects 
to  the  latter  as  involving  a  dangerous  socialistic  tendency, 
and  asserts  that  such  considerations  do  not  at  all  appertain 
to  the  science  of  finance.  Neither  in  these  schools,  however, 
nor  in  the  works  of  the  "  independent "  writers,  like  Neu- 
mann, Stein  and  Roscher,  does  he  find  an  answer  to  the  great 
question  :  What  is  the  ethical  basis  of  direct,  as  compared 
with  indirect,  taxation  ? 

An  answer,  he  thinks,  is  possible  only  through  a  study  of  his- 
torical development.  With  characteristic  German  thorough- 
ness, but  with  what  seems  unnecessary  detail,  Vocke  begins 
with  a  psychological  analysis  of  the  individual  and  traces  the 
evolution  of  his  economic  condition  and  qualities  through  the 
family  and  tribe  to  the  state.  In  the  patriarchal  stage,  as  in 
the  family,  the  contributions  of  the  individual  to  the  support 
of  the  whole  are  compulsory,  universal  and  proportional  to 
property.  In  the  feudal  state  the  contributions  of  the  vassal 
take  the  shape  of  personal  services  and  of  payments  in 
kind,  afterwards  converted  into  money  payments.  Then 
begin  the  customs  and  duties,  the  fees  and  tolls,  the  excises 
or  evil  duties  (mala  tolta),  all  of  which  rest  primarily  upon 
power  —  upon  the  imperious  necessities  of  the  overlord. 
The  legal  basis  is  the  princely  prerogative,  the  imperium;  in 
other  words,  naked  force.  Quite  different  from  these  veri- 
table impositions  are  the  taxes  proper.  Beginning  as  the 
trinoda  necessitas,  aids  and  contributions,  they  soon  develop 
into  poll,  property,  and  finally  into  profit  taxes.  These 
taxes,  properly  so  called,  rest  on  voluntary  contributions, 
not  on  mere  force ;  they  are  universal,  not  special ;  their 


RECENT  EUROPEAN  LITERATURE  367 

standard  is  personal  ability,  not  mere  expediency.  In  the 
tax  there  is  a  moral  quality,  in  the  customs  and  excises 
there  is  none. 

This  is  the  keynote  of  Vocke's  book.  The  tax  proper  in 
its  historical  genesis  is  the  direct  tax,  and  connotes  certain 
ethical  ideas  ;  the  indirect  taxes  are  properly  not  taxes  at 
all,  but  imposts,  and  carry  with  them  no  moral  implication. 
He  makes  a  careful  study  of  the  development  of  indirect 
taxation  in  the  next  political  form  —  the  absolute  mon- 
archy ;  and  he  shows  how  and  why  the  basis  of  direct 
taxation  was  changed  from  property  to  product.  The  re- 
maining two-thirds  of  the  work  are  devoted  to  a  considera- 
tion of  taxation  in  the  actual  or  constitutional  state.  He 
concludes  that  the  correct  point  of  view  has  been  won,  and 
that  future  reform  must  proceed  in  the  path  of  elaborating 
the  direct  taxes  and  of  curtailing  the  indirect  taxes. 

Vocke's  book  may  be  termed  a  study  in  the  philosophy  of 
taxation.  It  contains  no  figures,  and  but  few  facts.  The 
author's  contention  as  to  indirect  taxation  may  be  met  by 
the  reflection  that  justice  cannot  be  the  sole  maxim  of  taxa- 
tion ;  for  the  chief  practical  consideration  is  to  balance  the 
budget,  and  some  taxes  which  are  technically  just  may  be  prac- 
tically unremunerative  and  therefore  unserviceable.  More- 
over, Vocke  fails  to  perceive  that  there  are  various  kinds  of 
indirect  taxes,  and  that  many  of  the  imperfections  of  the  older 
systems  are  removable.  Yet,  on  the  whole,  he  will  serve  as  a 
useful  antidote  to  such  flimsy  thinkers  as  McCulloch,  who  ex- 
erted so  considerable  an  influence  on  English  views  on  taxation. 

In  his  new  book  entitled  The  Elements  of  the  Science  of 
Finance,1  which  constitutes  the  second  volume  of  Franken- 
stein's Hand-  undLehrbuch  der  Staatswissenschaften,  Dr.  Vocke 
devotes  himself  to  the  discussion  of  general  principles.  It  is 
a  relief,  after  the  huge  and  many-volumed  German  works  on 
the  subject,  to  find  the  science  here  treated  as  a  whole  and  in 
so  compact  a  form.  In  other  respects,  also,  Dr.  Vocke's  work 

1  Die  Grundziige  der  Finanzwissenschajt.  Von  Dr.  Wilhelm  Vocke. 
Leipzig,  C.  L.  Hirschfeld,  1894.  — xii.,  446  pp. 


368  ESSAYS  IN  TAXATION 

differs  from  most  of  its  German  predecessors.  It  contains 
almost  no  references  to  literature  and  it  is  written  in  a  style 
calculated  to  interest  the  average  layman.  But  to  those 
acquainted  with  the  work  just  discussed,  the  present  volume 
will  not  bring  much  that  is  new. 

Here,  as  before,  he  looks  upon  financial  history  simply  as 
the  medium  of  bringing  out  more  and  more  clearly  with 
every  generation  the  idea  of  faculty.  Here,  as  before,  he 
confines  the  term  tax  to  direct  taxation  and  eliminates  from 
the  whole  field  of  compulsory  revenue  the  so-called  Ver- 
brauchsauflagen,  or  indirect  taxes  on  consumption.  His 
whole  classification  of  revenues  is  very  confusing.  On  the 
one  hand  he  puts  the  private  economic  revenues,  by  which 
he  understands  those  from  the  public  domain  and  from  the 
prerogatives  as  well  as  from  industrial  undertakings ;  on  the 
other  hand  he  puts  the  compulsory  revenues,  divided  into 
fees,  payments  for  transactions  (Verkehrsabgaben)  and  taxes. 
Between  these  he  puts  another  category,  the  so-(falled 
"mixed"  revenues,  which  he  again  divides  oddly  enough 
into  economic  monopolies,  fiscal  monopolies  and  imposts 
(  Verbrauchsauflagen).  It  will  be  seen  how  unmodern  this  is, 
and  how  little  Dr.  Vocke  has  profited  by  recent  discussion 
both  at  home  and  abroad. 

At  the  same  time,  in  his  treatment  of  taxation  we  find  many 
good  points,  such  as  his  examination  of  the  place  where  a 
tax  ought  to  be  paid,  involving  some  of  the  difficult  questions 
of  double  taxation.  A  valuable  feature  of  the  book  is  the 
discussion  of  the  norm  of  taxation  and  the  measure  of  faculty, 
in  which  he  treats  successively  of  property,  product  and 
income.  Undue  stress  seems  to  be  laid  on  the  second  of 
these,  although  the  author  cleverly  exposes  some  of  the 
exaggerations  of  his  predecessors.  Most  of  the  book  is  of 
interest  chiefly  to  Germans ;  but  as  there  are  certain  broad 
traits  of  industrial  development  common  to  all  countries, 
students  of  American  and  English  finance  will  find  in  Dr. 
Vocke's  volume  many  hints  which  can  be  fruitfully  applied 
to  conditions  at  home.  The  bibliography,  especially  as 


RECENT  EUROPEAN  LITERATURE  369 

regards  foreign  literature,  is  weak.  The  book  can,  never- 
theless, be  recommended,  with  important  reservations,  to 
advanced  students. 

II.  France. 

After  the  volume  of  McCulloch,  published  in  1853,  no 
English  work  on  the  principles  of  taxation  appeared  for 
forty  years.  English  and  American  readers  were  compelled 
to  depend  on  German  and  French  treatises ;  and,  from 
greater  familiarity  with  the  language,  more  commonly  on 
the  latter.  But  since  it  has  been  an  unfortunate  habit  of 
many  French  writers  on  finance  to  discuss  their  topics  in 
happy  disregard  of  the  newest  thought  in  other  countries, 
it  follows  that  even  their  most  approved  works  on  taxation 
give  the  reader  only  the  French  view,  not  the  wider  scientific 
or  comparative  view.  This  reproach  to  French  literature 
has  now  been  removed  by  the  admirable  work  of  Professor 
Denis,  who  is,  however,  not  a  Frenchman,  but  a  Belgian. 

Professor  Denis  made  his  reputation  as  an  authority  on 
finance  some  years  ago  with  the  valuable  report  to  the  city 
council  of  Brussels  on  the  income  tax,  afterwards  reprinted 
as  a  bulky  volume.  Since  that  time  he  has  been  giving 
courses  of  lectures  on  finance,  which  were  subsequently  pub- 
lished in  book  form  under  the  general  title  Taxation.1  The 
present  volume  gives  the  ground  covered  in  1886-87 ;  a 
succeeding  volume  will  continue  the  subject  so  as  to  include 
the  whole  field  of  taxation. 

The  fact  that  these  are  published  lectures  contributes 
to  the  value,  as  well  as  somewhat  to  the  shortcomings,  of  the 
book.  The  style  is  simple  and  clear,  and  the  arrangement 
is  logical  and  sharply  defined;  but  on  the  other  hand  the 
lecture  form  has  made  it  impracticable  to  give  authorities 
for  the  facts  and  opinions  quoted,  except  by  a  short  bibli- 

1  ISImpot.    Lemons  donnfies  aux  cours  publics  de  la  ville  de  Bruxelles. 
Par  H.  Denis,  Professeur  a  I'Universitfi.     Premiere  Serie.    Bruxelles,  Veuve 
Monnom,  1889. — 8vo,  xiii.,  309  pp.  —  [Accompagne  d'un]  Atlas  de  Statis- 
tique  cornparee.  —  Large  folio,  25  plates. 
SB 


370  ESSAYS  IN  TAXATION 

ography  at  the  close  of  each  chapter.  Furthermore,  the 
details  of  the  argument  have  not  been  pursued  with  such 
care  as  would  be  demanded  in  a  work  constructed  on  other 
principles.  Many  of  the  finer  points,  including  some  that 
are  of  permanent  practical  importance  in  other  coun- 
tries, receive  no  attention  at  all.  The  history  and  facts  of 
taxation,  again,  are  given  only  in  a  very  fragmentary  way. 
With  all  these  qualifications,  however,  the  book  of  M.  Denis, 
so  far  as  we  can  judge  from  the  present  instalment,  may  be 
regarded  as  one  of  the  most  valuable  works  on  taxation 
hitherto  published.  Its  chief  claim  to  recognition  is  not  so 
much  the  views  of  the  author,  as  the  calm  and  unbiassed 
consideration  of  the  doctrines  of  all  his  predecessors.  The 
fundamental  vice  of  many  writers  is  the  assumption  that  the 
views  expressed  by  them  are  new ;  for  ignorance  of  economic 
and  financial  literature  is  scarcely  less  common  than  igno- 
rance of  economic  and  financial  facts. 

Professor  Denis,  considering  the  science  of  finance  as  a  sub- 
ordinate division  of  sociology,  and  as  distinct  from  political 
economy  although  having  many  points  in  connection  with  it, 
attempts  to  lay  down  the  laws  of  the  relations  of  these  sciences. 
The  greater  part  of  the  book  is  devoted  to  a  discussion  of  the 
problems  of  justice,  and  to  a  consideration  of  the  various 
direct  taxes.  On  many  of  the  important  questions,  such 
as  progression,  minimum  of  subsistence,  incidence,  the  basis 
of  taxation,  etc.,  readers  who  have  been  confined  to  French 
and  to  older  English  works  will  find  a  wealth  of  new  ideas 
and  a  mass  of  interesting  facts.  Of  course  no  work  written 
by  a  European,  or  at  all  events  by  a  continental,  scholar 
can  be  expected  to  treat  primarily  of  those  questions 
which  most  interest  and  affect  Americans;  but  if  there  is 
any  science  at  all  in  finance,  such  works  as  this  must  be 
deemed  of  the  greatest  importance  to  Americans  and  Euro- 
peans alike.  Some  minor  mistakes  might  be  noted  ;  as  the 
statement  that  the  idea  of  the  differentiation  of  the  income 
tax  is  to  be  ascribed  to  a  German  source.  In  reality  the 
theory  can  be  dated  back  to  the  beginning  of  the  cen- 


RECENT  EUROPEAN  LITERATURE  371 

tury  in  England,  and  it  has  been  fully  discussed  in  par- 
liamentary reports  and  in  scientific  essays  for  many  decades. 
But  such  smaller  points  must  be  overlooked  in  a  considera- 
tion of  the  general  tone  and  value  of  the  book.  The  useful- 
ness of  the  work  is  greatly  increased  by  the  accompanying 
volume  of  graphic  tables,  which  give  in  small  compass  what 
would  require  many  words  to  explain. 

France  has  of  late  been  devoting  more  attention  to  prac- 
tice than  to  theory.  Since  the  standard  work  of  Leroy- 
Beaulieu,  published  almost  two  decades  ago,  there  are  very 
few  books  to  be  mentioned  of  wider  scientific  interest,  if 
we  except  the  brilliant  little  sketch  by  Le*on  Say  published 
during  the  eighties.  But  France  also  has  had  her  practical 
difficulties  to  meet,  and  it  is  to  these  practical  questions  that 
most  of  the  recent  writers  have  addressed  themselves. 

In  France  the  discontent  is  of  long  standing.  Almost 
every  author  for  the  last  twenty  years  has  been  calling 
attention  to  the  lack  of  system  and  to  the  glaring  inequali- 
ties in  the  present  practice  of  taxation.  Ever  since  the  war 
of  1870  repeated  efforts  have  been  made  to  supplement  the 
direct  taxes  and  to  rid  the  country  of  some  of  the  burdensome 
indirect  taxes  by  the  creation  of  an  income  tax ;  and  the  advan- 
tages of  such  a  policy  had  been  hotly  discussed  by  both  sides. 
In  1887  the  strife  was  renewed  owing  to  the  proposition  of 
Dr.  Koenig,  whose  m$moire  on  A  New  Income  Tax 1  was  con- 
sidered so  important  that  the  project  recommended  in  its 
pages  was  adopted  by  M.  Dauphin,  then  minister  of  finance, 
and  was  introduced  as  a  government  measure. 

Dr.  Koenig  holds  that  the  imposition  of  an  income  tax 
assessed  on  the  declared  income  of  individuals  is  practically 
impossible  in  France.  He  finds  that  the  experience  of  Eng- 
land and  Germany  all  point  to  the  same  result  —  evasion  has 
become  a  system,  deceit  the  rule.  A  far  better  method 
appears  to  him  to  be  to  calculate  the  income  by  some  outward 

1  Un  nouvel  Impot  sur  le  Revenu.  Mfimoire  qui  a  inspirfi  le  Projet  du 
Gouvernement  relatif  a  la  Rfifonne  de  la  Contribution  personnelle  mobili5re. 
Par  Dr.  Gustave  Koenig.  Paris,  Guillaumin,  1887.  —  12mo,  Ixiii.,  195  pp. 


372  ESSAYS  IN  TAXATION 

sign,  such  as  the  house  rent.  The  contribution  personnelle  et 
mobilise  is  already  based  on  this  principle  which  Dr.  Koenig 
proposes  to  develop.  It  is  a  well-known  fact  that  the 
lower  we  go  in  the  social  scale  the  higher  is  the  propor- 
tion that  house  rent  bears  to  total  expenses  or  to  income. 
Rent  is  an  increasing  element  of  expense  in  proportion  as 
expenses  decrease  ;  the  poor  spend  relatively  far  more  than 
the  rich.  Dr.  Koenig  suggests  a  progressive  rate  of  taxa- 
tion assessed  on  the  house  rent,  maintaining  that  this  pro- 
gressive rate  will  counterbalance  the  decreasing  proportion 
that  rent  bears  to  expense.  The  plan  is  skilfully  worked 
out ;  but,  in  common  with  all  plans  of  taxing  expense,  it 
has  one  defect.  What  a  man  spends  is  no  sure  criterion  of 
his  income,  or  of  his  ability ;  and  the  higher  you  go,  the  more 
uncertain  does  the  criterion  become.  The  objection  to  the 
prevalent  French  system  is  that  the  wealthy  escape  their 
share  of  taxation ;  but  a  tax  on  expense,  even  at  a  progressive 
rate,  while  undoubtedly  a  step  in  advance,  would  not  com- 
pletely remove  the  objection.  Dr.  Koenig's  plan  has  indeed 
the  merit  of  doing  away  with  all  inquisitorial  difficulties  and 
of  attaching  itself  to  existing  conditions  ;  but  it  is  at  best  a 
half-hearted  measure,  a  mere  temporizing  expedient  to  be 
thrown  as  a  sop  to  the  radicals.  It  did  not  satisfy  them,  and 
the  bill  was  finally  killed  in  the  legislature.  The  work  is, 
nevertheless,  interesting  and  contains  much  valuable  infor- 
mation. The  allusions  to  America  are  not  always  felicitous. 
M.  Guyot,  in  his  work  on  The  Income  Tax,1  sets  himself  a 
different  task.  The  critics  of  the  French  system  of  taxation 
have  always  contended  that  personal  property  is  unduly 
exempted.  M.  Guyot  was  requested  by  official  authority  to 
investigate  their  propositions  for  an  income  or  for  a  general 
property  tax  ;  and  his  book  furnishes  a  noteworthy  addition  to 
the  studies  previously  made  by  Menier,  Denis  and  Chailley. 
The  report  is  one  of  description  rather  than  of  analysis,  and 

1  L^Impot  sur  le  Eevenu :  Eapport  fait  au  nom  de  la  Commission  du 
Budget.  Par  Yves  Guyot.  Paris,  Guillaumin  et  Cie,  1887. —  12mo,  xii., 
347pp. 


RECENT  EUROPEAN  LITERATURE  373 

the  various  parts  are  of  quite  unequal  value.  The  account 
of  the  English  income  tax  is  neither  detailed  nor  satisfactory. 
Attention,  however,  is  called  to  the  familiar  fact  that  the 
English  system  is  not  a  tax  on  general  income,  but  on 
product,  and  that  with  the  exception  of  schedule  D  (income 
from  commercial  pursuits,  etc.*)  it  may  well  be  compared  with 
the  contribution  fonciere  and  the  contribution  personnelle  et 
mobiliere  of  France.  The  description  of  American  taxation 
is  absurdly  inadequate,  and  that  of  the  German  system  is  not 
much  better.  On  the  other  hand,  the  working  of  the  Italian 
law  of  1877  taxing  the  income  of  movable  property  is  fully 
explained ;  and  a  good  chapter  is  devoted  to  the  income  and 
property  taxes  of  the  Swiss  cantons. 

M.  Guyot  is  not  a  partisan  of  the  income  tax  ;  he  advances 
the  common  argument  of  the  inquisitorial  character  of  the 
tax,  and  discusses  rather  superficially  the  question  of  progres- 
sion. The  history  of  the  various  projects  from  1848  onward 
is,  however,  well  written  and  interesting.  He  thinks  that 
France  committed  a  grave  mistake  after  the  Prussian  war 
in  increasing  the  indirect  taxes.  He  leans  toward  a  general 
property  tax,  like  that  advocated  by  Menier ;  and  in  dis- 
cussing the  objection  that  the  valuation  is  attended  with 
great  difficulties,  he  says:  "La  pratique  des  Etats-Unis  et 
de  la  Suisse  repond  encore  a  cette  objection."  It  is  to  be 
feared  that  this  rosy  view  is  caused  by  entire  ignorance  of 
American  methods  and  results.  His  error  shows  the  extreme 
danger  of  general  analogies,  and  tends  to  make  one  sceptical 
as  to  M.  Guyot's  other  propositions. 

The  practical  outcome  of  the  report  is  a  proposal  to  reform 
the  property  taxes.  The  land  tax,  as  imposed  in  1790,  is  an 
apportioned  tax.  As  a  consequence,  as  early  as  1821  the  divi- 
sion between  the  departments  and  the  communes  was  so  un- 
equal that  in  some  cases  the  tax  amounted  to  one-sixth,  in 
others  to  only  one-seventeenth,  of  the  rent  or  produce.  A  gen- 
eral valuation  or  cadastre  was  begun  in  1808  but  was  not 
finished  until  1851 ;  and  in  the  meantime  the  valuation  has 
again  greatly  changed,  so  that  at  present  the  amount  of  tax  paid 


374  ESS AyS  IN  TAXATION' 

varies  from  one  to  twenty  per  cent  of  the  rent.  As  an 
escape  from  this  crying  inequality,  Guyot  demands  its  con- 
version into  a  percentage  tax,  in  order  that  each  plot 
may  bear  its  proportionate  burden.  He  would,  moreover, 
have  the  tax  levied  on  capital  value,  rather  than  on  rent 
or  annual  value.  A  similar  reform  is  suggested  for  the 
tax  on  personal  property  (la  contribution  personnelle  et 
mobiliere^),  which  since  1832  has  been  apportioned.  These 
changes,  together  with  an  abolition  of  the  duties  on  the  trans- 
fer of  land,  amounting  at  present  to  ten  per  cent  of  the 
value,  would  in  his  opinion  result  in  a  far  more  equable  and 
remunerative  fiscal  system,  and  would  serve  as  an  introduction 
to  still  greater  and  more  important  reforms.  The  student 
of  comparative  taxation  will  find  in  the  volume  many  useful 
hints. 

In  a  widely  read  work  on  Financial  Reform1  another 
remedy  is  proposed.  The  title  is  somewhat  misleading,  as 
M.  Raynaud  is  the  member  of  the  society  for  financial  reform 
who  offered  the  prize,  while  M.  Lorrain  is  the  author  of  the 
essay  which  took  the  prize.  M.  Lorrain's  plan,  based  on 
taxation  of  expense,  is  very  simple.  He  would  have  the 
government  abolish  all  existing  taxes  except  the  import  and 
succession  duties.  In  their  stead  the  government  would 
defray  all  its  expenses  through  the  issue  of  circulating  notes 
payable  in  three  years.  These  notes  (bons  du  tr£sor~)  while 
outstanding,  would  be  subjected  to  a  tax  of  ten  centimes  per 
day  for  every  hundred  francs,  the  tax  being  paid  by  the 
holder,  who  affixes  stamps  for  the  requisite  amount  to  the 
notes.  The  idea  is  that  the  notes  are  to  form  the  sole  cir- 
culating medium  (with  the  exception  noted  below)  ;  and 
that,  since  every  one  must  use  them,  every  one  will  pay  a 
tax  in  proportion  to  his  expense.  To  provide  for  the  exi- 
gencies of  trade,  all  checks,  drafts,  bills  of  exchange,  etc.,  are 

1  Les  Reformes  Fiscales.  Revolution  Pacifique  par  1'Impot  sur  les 
Revenus.  Systeme  de  M.  Jacques  Lorrain,  premier  laurgat,  etc.  Par 
A.  Raynaud,  avec  une  preface  d'Augustin  Gallopin.  Paris,  Guillaumin, 
1888.  —  viii.,  195  pp. 


RECENT  EUROPEAN  LITERATURE  375 

subjected  to  a  like  tax.  No  note  is  to  be  issued  under  one 
hundred  francs,  so  that  the  poor,  who  will  continue  to  use 
small  silver  change,  will  be  practically  exempt.  The  sale 
of  the  stamps  will  defray  all  public  expenses. 

Were  it  not  that  this  fantastic  idea  received  the  prize  of 
two  thousand  francs,  and  that  the  society  for  financial  re- 
form circulated  it  extensively,  it  would  not  deserve  notice 
here.  Its  absurdity  is  apparent.  As  a  currency  scheme  it 
approaches  dangerously  near  to  the  fiat-money  craze ;  for 
the  government  will  have  no  check  on  its  extravagance,  and 
the  notes,  like  the  assignats  of  old,  must  inevitably  depre- 
ciate. As  a  tax  scheme  it  is  flagrantly  inequitable,  for  the 
tax  will  be  paid,  not  by  the  consumer,  as  is  claimed,  but  by 
the  debtor,  whether  he  be  producer  or  consumer.  Even  if 
paid  by  the  consumer,  it  would  be,  like  most  taxes  on  con- 
sumption, regressive,  or  as  the  French  say,  progressif  d 
rebours.  Finally,  it  would  fall  harder  on  the  working 
classes  than  on  all  others,  because  it  would  bring  about 
compulsory  purchases  of  commodities  in  order  to  get  rid  of 
the  notes  as  soon  as  possible.  To  call  such  a  tax  Vimpdt  sur 
les  revenue  is  a  crass  misnomer. 

It  would,  however,  lead  us  too  far  afield  to  pursue  the  study 
of  practical  tax  reform  in  France.  What  primarily  interests 
us  here  is  the  general  scientific  work  in  taxation ;  and 
with  two  exceptions  the  recent  years  have  little  to  show. 
The  book  of  Professor  Worms,  on  The  Science  of  Finance,1  is 
a  smoothly  written  discussion  of  some  general  questions. 
The  author  displays  familiarity  with  the  older  German  liter- 
ature ;  but,  as  he  himself  states,  desires  to  give  only  an  ele- 
mentary account  of  some  of  the  fundamental  problems.  He 
is  on  the  whole  very  fair  ;  but  the  book  is  not  clear-cut, 
and  is  not  apt  to  exert  a  considerable  influence  outside  of 
France.  A  distinctly  abler  work  is  that  of  Professor  Stourm. 

M.  Stourm  has  long  been  favorably  known  as  the  author 

1  Doctrine,  Histoire,  Pratique  et  Reforme  Financiere  ou  Expose  elemen- 
taire  et  critique  de  la  Science  des  Finances.  Par  Emile  Worms,  Professeur 
a  la  Faculty  de  Rennes.  Paris,  A.  Giard,  1891.  —  8vo,  401  pp. 


376  ESSAYS  IN  TAXATION 

of  an  excellent  book  on  the  Budget,  as  well  as  of  the  classic 
study  on  the  Finances  of  the  Old  Regime  and  the  Revolution. 
It  was  natural,  therefore,  to  expect  that  his  new  book  on 
Q-eneral  Systems  of  Taxation l  would  be  an  important  contri- 
bution to  science.  As  a  matter  of  fact,  the  work  proves  to 
be  in  some  respects  disappointing. 

As  in  all  the  writings  of  M.  Stourm,  the  reader  will  in- 
deed find  a  simplicity  and  clearness  that  leave  nothing  to  be 
desired.  But  some  readers  will  question  whether  the  sim- 
plicity is  not  in  this  case,  at  least,  to  some  extent  purchased 
at  the  cost  of  thoroughness.  To  the  student  who  knows 
anything  of  the  complexities  of  many  of  the  problems,  the 
sang-froid  with  which  whole  classes  of  arguments  are  either 
absolutely  ignored  or  coolly  brushed  aside  is  surprising. 
M.  Stourm  is  a  conservative ;  but  that  he  should  treat  the 
arguments  of  his  opponents  so  cavalierly  is  disheartening. 
The  book  has  many  admirable  points  ;  it  brings  clearly 
before  us  the  real  problems  of  French  taxation,  it  abounds 
in  felicitous  illustrations,  and  it  has  some  excellent  criti- 
cism of  certain  French  projects.  Its  chief  defect  is  its  insu- 
larity. Although  it  abounds  in  references  to  French  works, 
only  a  single  foreign  author  on  finance  is  mentioned  later  than 
John  Stuart  Mill,  and  that  one,  an  American,  in  a  wrong 
connection  and  with  a  mutilated  title.  Not  a  word  is  said 
about  the  contributions  to  theory  made  by  the  Germans,  the 
Italians,  the  Dutch  and  others,  during  the  past  ten  or  twenty 
years.  Even  as  to  the  practical  discussions,  we  find  with  a 
few  exceptions  little  that  has  not  already  been  said,  although 
perhaps  not  with  the  same  grace  and  skill,  in  other  works. 
It  may  be  alleged  in  extenuation  that  the  book  was  meant  to 
explain  the  French  system  of  taxation ;  but  there  is  noth- 
ing in  the  title  t«  suggest  this,  and  even  in  a  discussion  of 
the  French  system  more  regard  should  have  been  paid  to 
general  theory.  The  book  also  contains  some  errors  of  fact. 
The  system  of  direct  taxation  in  America  is  mentioned  as  a 

1  Systemes  Generaux  d'Impots.  Par  Ren6  Stourm,  Ancien  Inspecteur  des 
Finances.  Paris,  Guillaumin  et  Cie,  1893.  —  415  pp. 


RECENT  EUROPEAN  LITERATURE  377 

warning  example  of  the  "  mixed  system,"  or  combination  of 
the  income  tax  with  the  property  tax ;  while  the  general 
property  tax,  or  "  impot  sur  le  capital "  is  said  never  to  have 
existed  alone  anywhere. 

The  work  is  in  a  measure  redeemed  by  a  vivacity  of  treat- 
ment and  a  charm  of  style,  unusual  even  among  Frenchmen. 
Were  it  as  erudite  and  profound  as  it  is  attractive,  it  would 
rank  with  the  most  remarkable  books  of  the  decade. 

III.    Italy,  Holland  and  Spain. 

In  some  respects  the  best  work  on  certain  lines  of  public 
finance  has  recently  been  done  by  the  two  nations  with 
whose  literature  we  are  less  familiar,  —  the  Italian  and  the 
Dutch  It  is  worth  while  to  call  attention  to  a  few  of  their 
late  books  on  general  theory. 

The  Italians  have  always  been  remarkable  for  the  avidity 
with  which  they  have  seized  upon  and  attempted  to  assimilate 
foreign  theories ;  and  so  it  is  with  the  application  of  the  more 
recent  doctrines  of  value  to  fiscal  problems.  Professor  Ricca- 
Salerno's  Science  of  Finance 1  is  only  a  compendium,  but  it  is 
noteworthy  for  its  clear  and  succinct  discussion  of  funda- 
mental problems.  It  deals  very  little  with  facts,  and  never 
with  details,  but  attempts  to  lay  down  guiding  principles. 
It  is  in  many  respects  more  difficult  to  write  a  small  work 
than  a  large  one,  and  Ricca-^alerno  might  easily,  had  he 
so  chosen,  have  expanded  his  volume ;  for  his  previous 
elaborate  works  on  the  History  of  Fiscal  Doctrines  in  Italy 
and  the  Theory  of  Public  DeUs  show  that  he  is  fully 
acquainted  with  all  the  literature  of  the  subject.  In  this 
little  work  he  discusses  first  what  he  considers  to  be  the 
three  principal  doctrines  of  public  finance, — the  theories 
of  consumption,  exchange  and  production.  Many  of 
his  observations  are  acute,  but  his  criticisms  as  well  as 
his  conclusions  are  based  chiefly  on  those  of  Sax.  He 

1  Scienza  delle  Finanze.  Di  Giuseppe  Kicca-Salerno.  Florence,  J.  Bar- 
bera,  1888.  —  12mo,  263  pp. 


378  ESSAYS  IN  TAXATION 

treats  of  the  doctrines  of  benefit  and  of  faculty  in  mat- 
ters of  public  revenue  ;  but  like  most  of  the  continental 
writers  he  distinguishes  only  between  fees  and  taxes. 
Bicca-Salerno's  attempt  always  to  find  the  golden  mean 
sometimes  brings  him  into  difficulties,  as  in  the  case  of  pro- 
gressive taxation,  which  he  says  is  not  at  all  a  matter  of 
theory,  but  of  practice.  The  doctrine  of  incidence  is  passed 
over  a  little  too  summarily,  but  the  results  of  recent  studies 
are  shown  in  the  application  of  the  final-utility  theory  to 
fiscal  problems.  On  the  whole  the  little  work  is  important, 
not  only  because  of  these  newer  views,  but  also  on  account 
of  the  eminently  lucid  presentation,  in  small  compass,  of  the 
basic  doctrines. 

Not  only  Ricca-Salerno  but  other  writers,  young  and  old, 
have  started  out  in  their  discussion  from  a  consideration 
of  the  more  recent  theories  of  value.  Professor  Viti  de 
Marco,  in  his  Theoretical  Character  of  Financial  Economy,1 
endeavors  to  point  out  the  resemblances  and  the  differences 
between  finance  and  economics,  criticising  the  prevalent  dis- 
tinction between  science  and  art,  and  pointing  out  the  real 
nature  of  natural  law  in  finance.  In  a  more  acute  work 
on  The  Scientific  Data  of  Public  Finance 2  Mazzola  attempts 
to  state  the  general  characteristics  of  finance  as  a  social 
phenomenon.  He  not  only  deals  with  questions  of  method, 
but  devotes  himself  especially  to  the  economic  basis  of  tax- 
ation, taking  issue  in  several  points  with  Sax.  His  work, 
full  of  dialectic  and  of  keen  reasoning,  is  only  for  the  most 
advanced  student.  It  is,  however,  questionable  whether 
any  attempt  to  explain  taxation  solely  as  a  form  of  value  can 
ever  succeed. 

Professor  Zorli  goes  a  step  further.  Starting  out  with  two 
works  on  Fiscal  Systems^  and  on  the  Italian  Law  of  Tax- 

1 II  Carattere  Teoretico  delV  Economia  Finanziaria.  Di  A.  de  Viti  de 
Marco.  Koma,  Pasqualucci,  1888.  —  8vo,  163  pp. 

2  /  Dati  Scientiftci  della  Finanza  Pubblica.  Di  Ugo  Mazzola.  Koma, 
Loescher,  1890.— 8vo,  216pp. 

8  Sistemi  Finanziari.  Di  Alberto  Zorli.  Bologna,  Zanichelli,  1885. — 
8vo. 


RECENT  EUROPEAN  LITERATURE  379 

ation,1  he  soon  found  it  necessary  to  get  a  theoretical  basis  for 
his  conclusions.  This  he  sought  in  his  Science  of  Taxation.2 
He  tells  us  that  neither  the  "  concrete-abstract "  method  nor 
the  historical  method  alone  can  solve  the  problems.  For  the 
science  of  taxation  he  claims  a  complete  autonomy  as  the 
most  important  part  of  finance,  but  would  include  there- 
under also  the  subject  of  fees.  His  classification  of  public 
revenues,  incidentally  remarked,  displays  some  acute  criti- 
cism of  his  German  and  Austrian  predecessors,  but  is  not 
wholly  satisfactory.  In  the  chapter  on  the  causes  of  taxa- 
tion, Zorli  discusses  at  some  length  the  views  of  Sax,  and 
while  conceding  that  subjective  value  and  final  utility  play 
a  considerable  role  in  the  interpretation  of  actual  tax  sys- 
tems, he  points  out  that  they  do  not  form  the  sole  or  even 
the  most  important  explanation.  The  final  chapter  on  the 
effects  of  taxation  is  based  largely  on  the  work  of  Cournot. 
In  a  still  later  book,  entitled  the  Psychological  Theory  of 
Public  Finance?  he  develops  his  own  ideas  a  little  more  fully. 
His  contention  is  that  just  as  value  and  utility  depend  upon 
certain  psychological  processes,  so  taxation  which  deals  with 
public  value  must  be  studied  from  the  same  point  of  view. 
In  his  chapter  on  the  psychological  basis,  he  discusses  the 
Austrian  school ;  in  the  succeeding  chapter  on  the  relations 
of  political  and  economic  sentiment  to  public  finance,  he  de- 
velops the  suggestive  idea  of  Loria.  But  his  whole  treat- 
ment remains,  so  to  say,  up  in  the  clouds  ;  and  it  is  often 
difficult  to  see  the  application  to  practical  problems.  Finally, 
Professor  Conigliani,  in  his  General  Theory  of  the  Effects  of 
Taxation?  gives  a  very  abstract  discussion  of  taxation  re- 

1 II  Diritto  Tributario  Italiano.    Di  Alberto  Zorli.    Bologna,  Tip.  Com- 
positori,  1887.  —  8vo. 

2  La  Scienza  dei  Tributi  in  rapporto  alle  Eecenti  Teorie  Economiche.    Di 
Alberto  Zorli.    Bologna,  Fava  e  Garagnani,  1890.  —  8vo,  119  pp. 

3  Teoria  Psicologica  ddla  Finanza  Pubblica.    Di  Alberto  Zorli.    Bologna, 
1890.  —  8vo,  77pp. 

4  Teoria  Generate  degli  Effetti  Economici  delle  Imposte.    Saggio  di  Eco- 
nomia  Pura.    Del  Dottor  Carlo  A.  Conigliani.    Milano,  Hoepli,  1890.  —  8vo, 
281  pp. 


380  ESSAYS  IN  TAXATION 

garded  simply  as  an  addition  to  the  cost  of  pioduction. 
He  deals  with  the  most  fundamental  problems  ;  but  the 
effort  is  a  little  too  much  for  him,  and  the  treatment  of 
so  far-reaching  a  set  of  questions  is  far  from  satisfactory. 
All  these  Italian  works,  however,  show  the  undoubted  im- 
pulse given  by  the  modern  doctrines  of  value  and  utility  to 
the  investigation  of  fiscal  theory. 

Somewhat  similar  is  the  impression  made  by  the  recent 
Dutch  works.  The  writers  of  Holland  are  not  so  well 
known  as  they  deserve  to  be.  The  contest  between  the 
schools,  that  has  agitated  Germany  and  Italy  and  has  spread 
to  England  and  America,  has  never  affected  Holland.  The 
Dutch  writers  have  pursued  in  harmony  the  even  tenor  of 
their  way,  accepting  what  was  best  in  both  schools,  and  de- 
veloping on  independent  lines.  This  harmony  is  in  great 
part  due  to  the  leader  of  the  Dutch  economists,  N.  G.  Pierson, 
who  from  the  very  outset,  two  decades  ago,  accepted  Jevons' 
theories.  In  fact,  the  final-utility  theory  of  value  had  been 
accepted  and  developed  in  many  of  its  applications  in  Hol- 
land years  before  the  so-called  Austrian  school  made  itself 
talked  of.  On  the  other  hand,  Holland  has  not  been  lacking 
in  those  who  have  devoted  themselves  especially  to  the  his- 
torical and  statistical  side  of  economics,  without  thinking, 
however,  that  they  possessed  all  the  truth.  The  science  of 
finance  was  treated  at  a  somewhat  later  stage  of  Dutch 
development,  but  with  equal  success. 

One  of  the  most  recent  treatises  is  Cort  van  der  Linden's 
Text-look  of  Finance,1  which  deals  in  this  volume  only  with 
taxation.  After  a  general  discussion  of  the  nature  and 
importance  of  public  revenues,  the  author  treats  of  the  three 
divisions  of  taxation,  as  based  respectively  on  the  legal,  the 
economic  and  the  fiscal  principles.  The  legal  principles  are 
those  of  equality,  of  what  he  calls  social  policy,  and  of 
universality.  The  economic  principles  deal  with  the  pres- 

1  Leerboek  der  Financien.  De  Theorie  der  Belastingen.  Door  P.  W.  A. 
Cort  van  der  Linden.  Hoogleeraar  aan  de  Faculteit  der  Rechtsgeleerdheid 
de  Groningen.  The  Hague,  Gebr.  Belinfante,  1887.  — 8vo,  608  pp. 


RECENT  EUROPEAN  LITERATURE  381 

sure  and  the  shifting  of  taxation.  The  fiscal  principles  are 
those  of  adequacy,  fixity,  elasticity,  and  innocuity  or  the 
least  possible  detriment  to  production  and  exchange.  This 
division  is  perhaps  not  unexceptionable.  An  important  part 
of  the  work  is  devoted  to  the  administrative  side  of  public 
finance,  such  as  the  methods  of  payment,  of  control,  of 
remedies  and  of  penalties.  This  includes  both  an  historical 
and  a  comparative  discussion,  and  attempts  to  draw  some 
general  conclusions.  The  author  divides  taxes  into  those  on 
product  (ontvangstbelastingeri),  on  expense,  on  exchange  and 
on  income  ;  and  he  compares  the  systems  in  England,  Ger- 
many, France  and  Holland .  While  not  making  any  noteworthy 
contribution  to  theory,  van  der  Linden's  work  is  welcome  as 
extending  our  material  for  a  comparative  science  of  finance. 
A  more  important  treatise  is  Pierson's  Handbook  of  Politi- 
cal Economy, l  of  which  the  first  part  was  published  in  1884. 
Over  half  of  the  present  volume  is  concerned  with  public 
finance  ;  although  many  of  the  problems  had  several  years 
ago  been  dealt  with  by  him  in  his  Grrondbeginselen  der 
Staathuishoudlcunde.  Pierson's  treatment  is  characterized 
by  broad  touches.  He  is  thoroughly  at  home  in  all  the 
recent  continental,  English  and  even  American  literature, 
and  tries  to  get  to  the  bottom  of  many  difficult  problems. 
He  is  one  of  the  first  to  attempt  a  comprehensive  theory 
of  incidence  combining  Schaffle's  amortization  theory  with 
some  more  eclectic  views.  He  sharply  criticises  Mill's 
treatment  of  the  principle  of  equality  of  sacrifice,  and 
constructs  his  whole  theory  on  the  principle  of  faculty. 
Everywhere  the  subject  is  treated  with  a  master-hand.  It 
is  a  work  not  so  much  for  the  beginner,  as  for  the  advanced 
student  who  desires  to  analyze  more  carefully  the  leading 
theories  of  modern  public  finance.  Among  the  discussions 
to  which  he  devotes  special  attention  is  that  of  progressive 
taxation,  in  the  course  of  which  he  criticises  the  views  of 
the  other  Dutch  writers,  which  have  been  treated  in  detail 

1  Leerboek   der    Staathuishoudkunde.     Door   N.    G.  Pierson.     Tweede 
Peel.    Haarlem,  De  Erven  F.  Bohn,  1890.  —  8vo,  xix.,  627  pp. 


382  ESSAYS  IN  TAXATION 

elsewhere,1  and  whose  influence  is  seen  in  the  recent  reforms 
of  Dutch  taxation  described  in  another  chapter  of  the  present 
work.2 

To  mention  only  the  Italian  and  the  Dutch  works  would 
by  no  means  exhaust  the  literature  of  value  to  the  economist 
among  the  less  well-known  continental  nations.  Even  in 
the  Iberian  Peninsula  there  are  signs  of  renewed  scientific 
activity. 

The  Portuguese  work  of  Pereira  Jardim  on  the  Science 
of  Finance3  interests  us  more  from  the  standpoint  of  fiscal 
practice  than  of  fiscal  theory.  Not  that  theoretic  discussions 
are  absent  from  his  book  or  without  ability  ;  but  as  the  work 
is  posthumous,  based  on  lectures  delivered  several  years 
ago,  the  field  of  discussion  does  not  include  the  newer 
theories  of  the  last  decade  or  two.  Leroy-Beaulieu  and 
Parieu  among  the  French,  Rau  and  Jakob  among  the  Ger- 
mans are  the  latest  foreign  authors  discussed.  Pereira 
Jardim  does  not  really  add  anything  to  theory  ;  but  the 
history  and  description  of  Portuguese  public  finance,  and 
the  continual  references  to  the  inter-relations  between 
Portuguese  law  and  economics  will  be  welcome  to  the  stu- 
dent of  comparative  finance. 

On  the  other  hand,  the  two-volume  work  of  Professor 
Piernas-Hurtado  of  Madrid,  entitled  Treatise  on  the  Public 
Economy,*  is  interesting  in  many  ways.  Like  the  Italians 
and  the  Dutch,  the  Spanish  writers  have  profited  by  recent 
foreign  investigation,  and  treat  many  of  the  problems  from 
the  newer  point  of  view.  Piernas-Hurtado,  while  quoting 
liberally  from  Wagner  and  the  other  Germans,  does  not  fear 
to  take  issue  with  them  occasionally  and  preserves  his  own 

1  Cf.  my  work  on  Progressive  Taxation,  pp.  140-145,  182-189. 

2  Supra,  pp.  322-330. 

8  Principios  de  Finanqas,  gusendo  as  Prelec§5es  feitas  pelo  lente  da  Facul- 
dade  de  Direito.  Antonio  dos  Sanctos  Pereira  Jardim.  Quarta  edi§ao. 
Coimbra,  Imprensa  da  Universidade,  1891.  —  8vo,  395  pp. 

*  Tratado  de  Hacienda  Publica  y  Examen  de  la  Espanola.  Por  Jose  M. 
Piernas-Hurtado.  Cuarta  edition.  Madrid,  Gines  Hernandez,  1891.  —  8vo, 
540,  677  pp. 


RECENT  EUROPEAN  LITERATURE  383 

individuality.     This  we  notice   not   alone   in   questions  of 
theory,  but  in  problems  of  practical  politics. 

The  introductory  chapter,  on  the  history  of  the  science, 
is  valuable  as  calling  attention  to  numerous  Spanish  writers, 
not  alone  of  the  seventeenth  century  when  Spanish  litera- 
ture was  still  almost  at  the  flood,  but  also  of  more  recent 
times.  The  author  points  out  the  causes  of  the  essen- 
tially individualistic  trend  of  the  nineteenth-century  Span- 
iards, and  the  socialistic  reaction  tof  more  recent  years. 
The  general  features  of  the  development  are  the  same  in 
Spain  as  in  almost  all  the  other  European  countries.  Like 
some  of  his  German  models,  Piernas-Hurtado  devotes  a  num- 
ber of  chapters  to  the  conception  of  the  state,  to  economic  life 
in  general,  and  to  the  economics  of  the  state  in  particular. 
He  looks  on  public  expenses  as  public  consumption,  but 
gives  us  here  almost  nothing  but  platitudes.  When  we 
come  to  public  revenues,  however,  it  is  different.  He 
classifies  these  according  as  they  arise  from  gifts,  fiscal 
domains,  public  works,  fiscal  monopolies,  taxes,  eminent 
domain,  fines  or  escheats  ;  and  devotes  several  chapters  to 
each  of  the  important  classes.  The  most  noteworthy  point 
in  his  treatment  of  taxes  is  his  view  as  to  the  basis  of  taxa- 
tion. He  discusses  in  turn  expense,  income  and  property, 
as  bases,  and  finds  each  of  them  essentially  defective.  The 
really  equitable  basis  of  taxation  he  finds  to  be  faculty,  or 
the  economic  position  of  the  individual  as  shown  by  his 
"liquid  assets"  (el  impuesto  sobre  los  haberes  liquidos).  By 
this  term  he  wishes  to  denote  the  means  of  the  individual 
as  conditioned  by  his  needs,  or  the  proportion  between 
income  and  property  on  the  one  hand,  and  the  claims  made 
upon  him  by  expenses  on  the  other.  Piernas-Hurtado  thus 
simply  attempts  to  put  into  plain  language  the  marginal 
utility  theory  of  taxation,  as  developed  by  recent  Dutch 
and  Austrian  writers.  He  confesses  that  this  alone  will 
not  remedy  social  evils,  that  it  is  not  susceptible  of  an 
exact  mathematical  computation,  and  that  it  may  give  rise 
to  arbitrariness  ;  but  he  maintains  that  the  other  suggested 


384  ESSAYS  IN  TAXATION' 

bases  of  taxation  disclose  the  same  or  greater  defects. 
Regard  for  the  individual  position  of  the  contributor  is  in 
his  opinion  the  really  important  consideration.  The  vague- 
ness of  this  test  as  a  practical  programme  of  taxation  will 
at  once  strike  the  reader ;  but  Piernas-Hurtado  is  content 
to  leave  the  discussion  in  the  field  of  theory. 

In  treating  of  the  various  classes  of  taxation,  he  later 
makes  many  good  and  practical  suggestions.  The  whole 
of  his  second  volume  is  in  fact  devoted  to  the  history  and 
criticism  of  the  state,  local  and  colonial  public  finance  of 
Spain ;  and  he  clears  up  much  that  Parieu  and  other 
writers  have  failed  to  explain.  Like  so  many  of  the  con- 
tinental tax  reformers,  he  sees  the  greatest  promise  of  im- 
provement in  the  substitution  of  direct  for  indirect  taxes, 
and  he  devotes  a  considerable  portion  of  his  work  to  the 
proposed  adjustment  of  the  Spanish  public  revenues  to  the 
principles  of  uniformity  and  universality.  Several  chapters 
on  the  theories  and  practice  of  public  credit,  and  especially 
on  the  budget  and  financial  administration,  conclude  a  work 
whose  open-mindedness,  clearness  and  wide  range  of  view 
entitle  it  to  an  honorable  place  in  the  list  of  text-books  of 
finance. 

IV.    Switzerland. 

Switzerland  is  the  only  European  country  where  the 
general  property  tax  still  plays  an  important  role.  It 
is  the  one  state  whose  methods  of  taxation  bear  a  close 
resemblance  to  those  of  the  United  States.  It  would,  there- 
fore, be  reasonable  to  expect  that  a  work  of  such  pro- 
digious proportions  as  that  of  Professor  Schanz  on  Taxa- 
tion in  Switzerland  in  its  Development  since  the  Beginning 
of  the  Nineteenth  Century 1  should  be  of  the  utmost  impor- 
tance to  all  Americans  ;  and  this  expectat.on  is  realized. 

1  Die  Steuern  der  Schweiz  in  ihrer  Entwickelung  seit  Beginn  des  19  Jahr- 
hunderts.  Von  Georg  Schanz.  Stuttgart,  J.  G.  Gotta  Nachfolger,  1890.  — 
5  vols..  large  8vo,  384,  487,  383,  289,  489  pp. 


RECENT  EUROPEAN-  LITERATURE  385 

Rarely  in  the  history  of  economic  literature  has  a  work 
been  published  which  is  at  all  comparable  to  this  in  its 
value  to  the  American  student  of  finance. 

Professor  Schanz  earned  his  reputation  by  the  thorough 
work  displayed  in  his  JEnglische  Handelspolitik  gegen  Ende 
des  Mittelalters,  published  some  fourteen  years  ago,  as  well  as 
by  several  minor  works  on  the  history  of  labor.  In  1884  he 
started  the  Finanz-Archiv,  which  is  still  the  only  serious 
review  devoted  exclusively  to  the  science  of  finance.  In 
this  periodical  he  has  been  publishing  for  the  past  few  years 
detailed  histories  and  descriptions  of  the  tax  systems  of 
different  German  commonwealths,  which  have  challenged 
admiration  for  their  solidity  and  accuracy.  Now  he  offers 
to  the  scientific  world  a  work  which  stands  unequalled  in 
magnitude  of  scope  and  detail  of  treatment. 

A  word  first  as  to  the  methods  of  the  author.  The  opening 
volume  is  devoted  to  a  sketch  of  the  general  development  of 
Swiss  taxation.  A  preliminary  chapter  treats  of  the  federal 
taxes  and  of  the  general  situation ;  a  second  chapter,  of  the 
general  direct  taxes  in  the  cantons ;  a  third  chapter,  of  the 
licenses,  succession  duties,  military  tax,  etc.;  a  fourth  chapter, 
of  the  indirect  taxes  on  consumption ;  while  a  final  part  is  de- 
voted to  the  questions  of  local  taxation.  The  three  following 
volumes  take  up  each  of  the  twenty -five  separate  cantons  in 
detail ;  describe  the  history,  not  only  of  all  the  changes, 
but  of  all  the  attempted  reforms ;  and  close  with  a  minute 
statement  of  the  existing  condition  hi  each.  The  fifth  and 
final  volume  contains  the  text  of  all  the  important  tax  laws 
and  administrative  ordinances  for  each  canton  since  the 
beginning  of  the  century.  It  will  be  seen  at  a  glance  how 
stupendous  must  have  been  the  labor  necessary  to  complete 
such  a  task. 

Let  us  now  endeavor  to  ascertain  in  what  respects  the 
work  is  important  to  Americans.  Professor  Schanz  begins 
by  accepting  the  theory  advanced  by  the  present  writer 
regarding  the  historical  development  of  taxation  and  the 
position  of  the  general  property  tax  in  this  development. 
2c 


386  ESSAYS  IN  TAXATION 

He  shows  that  Switzerland,  like  the  United  States,  has 
retained  the  mediaeval  property  tax  up  to  this  day  ;  but  he 
further  shows  that  Switzerland,  unlike  the  United  States, 
has  successfully  endeavored  to  reconstruct  its  property 
tax  and  to  supplement  it  by  another  system  which  has 
brought  it  more  into  harmony  with  the  needs  of  the  present 
century.  The  conception  of  general  property  as  the  basis 
of  taxation  has  been  permeated,  gradually  but  with  ever- 
increasing  rapidity  during  the  past  thirty  years,  with  the 
ideas  of  product  and  of  income.  The  attempt  to  realize 
the  principle  of  ability  to  pay  has  resulted  in  dissatisfaction 
with  the  old  property  tax  and  a  remodelling  of  the  whole 
system.  The  methods  in  the  various  cantons  may  be 
summed  up  as  follows :  (1)  a  property  tax  plus  a  general 
income  tax  ;  (2)  a  property  tax  plus  a  partial  income  tax  ; 
(3)  a  property  tax  plus  a  supplementary  income  tax,  in 
the  sense  that  only  the  surplus  income  above  a  certain 
percentage,  supposed  to  represent  the  interest  of  the  taxable 
property,  is  assessed  ;  (4)  a  real  property  tax  plus  a  general 
income  tax.  Only  three  of  the  smaller  cantons  still  hold  to 
the  general  property  and  the  poll  taxes  ;  while  only  one 
canton  clings  to  the  once  universal,  but  still  more  primitive, 
system  of  the  land  tax. 

This  is  the  one  great  lesson  to  be  drawn  from  Swiss 
experience.  It  ought  to  be  sufficient  to  silence  all  those 
enthusiasts  who  cry  out  for  a  retention  of  the  present  Ameri- 
can system,  and  point  with  triumph  to  the  only  democratic 
republic  in  Europe  as  practising  the  same  methods.  On  the 
contrary,  the  one  great  effort  of  the  Swiss  legislatures  during 
the  past  half-century  has  been  to  supersede  the  general 
property  tax,  not  necessarily  by  the  income  tax,  but  by  some 
form  of  income  taxation — by  some  system  which,  directly  or 
indirectly,  makes  not  property,  but  product,  the  basis  of  taxa- 
tion. As  Professor  Schanz  sums  it  up  :  "  Ueberall  drangt 
sich  eben  mit  elementarer  Gewalt  der  Gedanke  durch,  dass 
es  doch  nicht  das  Vermogen,  sondern  das  Einkommen  ist, 
welches  man  eigentlich  treffen  will." 


RECENT  EUROPEAN  LITERATURE  387 

Let  us  now  leave  this  main  fact,  which  might  amply  serve 
as  a  text  for  a  whole  volume,  and  turn  to  some  of  the  other 
points  of  interest.  The  author  does  not  discuss  the  question 
of  taxation  of  corporations  as  a  whole,  but  presents  the  facts, 
the  most  important  of  which  have  been  used  in  another  chap- 
ter of  the  present  volume.  Other  points  upon  which  the 
Swiss  experience  is  extremely  instructive  are  the  different 
rates  of  taxation  for  various  kinds  of  property  ;  the  methods 
of  assessment,  according  to  market  value,  insurance  value 
or  par  value;  the  exemption  of  church  or  other  property; 
the  distinction  between  funded  and  unfunded  income ; 
and  the  subject  of  double  taxation  in  all  its  various  forms. 
But  the  four  chief  points  which  deserve  special  emphasis 
are  these:  the  methods  of  controlling  assessments,  the  ques- 
tion of  progressive  taxation,  the  succession  taxes  and  the 
system  of  local  taxation. 

Switzerland,  like  the  United  States,  has  tried  all  forms  of 
assessment  for  the  general  property  tax  —  self-assessment 
and  official  assessment,  oaths  and  no  oaths,  publicity  and  se- 
crecy ;  and  these  have  proved  equally  inefficient.  One  insti- 
tution, however,  has  been  developed  in  the  last  few  decades 
that  is  peculiar  to  Switzerland.  It  is  that  of  the  inventory 
(Inventarisatiori).  As  soon  as  a  taxpayer  dies,  his  entire 
property  is  seized  by  the  government  and  held  until  an 
exact  inventory  is  made.  If  this  discloses  fraud  in  the 
previous  self-assessments,  punitive  taxes  must  be  paid, 
ranging  in  some  cantons  over  a  period  of  ten  years.  This 
method  of  control  is  based  on  the  right  idea  ;  but  it  has 
its  objectionable  sides.  It  must  be  distressing,  to  say  the 
least,  to  the  family  of  the  deceased  when  the  tax  officials 
clap  their  seals  on  the  property,  as  it  were  in  the  very  cham- 
ber of  death.  It  has  also  its  weak  sides,  for  those  who  have 
even  a  short  time  to  prepare  for  death  commonly  give  away 
a  large  part  of  their  property.  Again,  the  inventory  natu- 
rally becomes  a  less  trustworthy  guide  the  further  back  we 
go,  so  that  at  its  best  it  can  serve  only  as  a  partial  index. 
But  notwithstanding  these  defects,  it  has  done  good  service 


388  ESSAYS  IN  TAXATION 

in  increasing  the  tax  receipts,  and  it  forms  to-day  one  of  the 
chief  subjects  of  dispute  in  the  Swiss  cantons. 

Another  point  which  has  attracted  attention  is  that  of 
progressive  taxation.  Switzerland  has  now  definitively 
accepted  the  principle  of  graduated  taxation  ;  and  the  can- 
tons apply  it  not  only  to  inheritance  and  to  income  taxes  but 
also  to  property  taxes.  Especially  since  1870,  a  large  ma- 
jority of  the  commonwealths  have  inserted  the  principle  into 
their  constitutions,  and  only  a  few  constitutions  fix  the 
limit  of  the  progression.  The  system,  far  from  causing 
any  wholesale  exodus  or  any  such  startling  confiscation  as 
we  read  of  from  time  to  time  in  the  newspapers,  has  proved 
so  satisfactory  that,  wherever  tried,  it  has  never  been  aban- 
doned. There  also,  Switzerland  is  not  at  one  with  the  United 
States. 

Thirdly,  about  two-thirds  of  the  Swiss  commonwealths  have 
rounded  out  their  system  of  direct  taxation  by  taxes  on  in- 
heritances and  on  bequests.  This  movement  is  an  old  one, 
and  has  gone  hand  in  hand  with  the  movement  to  supple- 
ment the  property  tax  by  an  income  tax.  The  United  States 
are  still  in  the  first  phases  of  the  reform;  for  until  very 
recently  the  agitation  was  confined  to  an  extension  of  the 
collateral  inheritance  tax.  Switzerland  has  passed  beyond 
this  phase,  for  its  system  applies  to  all  inheritances  and 
bequests,  with  a  rate  ranging  from  a  fraction  of  one  per  cent 
in  Zug,  to  as  much  as  twenty-five  per  cent  or  even  more  for 
non-relatives  in  Uri. 

Finally,  the  methods  of  local  taxation  are  instructive. 
Only  a  few  cantons  pursue  the  same  system  for  both  local 
and  commonwealth  purposes.  In  most  cases  the  income 
tax  is  a  commonwealth  tax,  while  the  local  tax  is  a  prop- 
erty tax,  and  often  a  real  property  tax.  In  addition  to 
the  local  property  tax,  however,  we  find  very  generally  a 
local  "  household  "  tax,  which  is  practically  a  system  of  poll 
taxation  designed  to  reach  some  of  those  who  escape  the  real 
property  tax.  The  local  tax  system  is  moreover  marked  by  two 
significant  facts.  In  the  first  place,  the  idea  of  progression, 


RECENT  EUROPEAN  LITERATURE  389 

which  is  commonly  applied  to  the  commonwealth  taxes,  is 
absent  in  the  local  taxes,  which  are  almost  uniformly  pro- 
portional. Secondly,  the  exemption  of  debts  —  mortgage 
debts  as  well  as  others  —  is  permitted  in  state  taxes,  but  is 
allowed  only  to  a  very  limited  degree  in  local  taxes. 

Enough  has  been  said  to  show  the  importance  of  Professor 
Schanz's  work.  It  does  not  pretend  to  discuss  questions  of 
theory,  and  yet  almost  every  page  contains  matter  of  more 
significance  to  the  average  American  than  whole  chapters  of 
some  of  the  usual  manuals  of  finance.  In  some  few  ques- 
tions of  finance  Switzerland  has  a  little  to  learn  from  us  ; 
in  most  matters  we  have  important  lessons  to  learn  from 
Switzerland.  What  these  lessons  are  has  been  only  faintly 
outlined  in  the  above  remarks  ;  but  it  is  to  be  hoped  that 
their  full  significance  will  erelong  be  appreciated  by  every 
American  student  and  by  every  American  legislator. 

V.  England. 

English  economic  literature  has  not  hitherto  been  very  fort- 
unate in  its  systematic  studies  of  fiscal  problems.  The  writ- 
ers prior  to  Adam  Smith  concerned  themselves  only  with 
scattered  questions  of  temporary  practical  interest,  and  dealt 
with  them  in  the  same  scrappy  manner  which  characterized 
their  treatment  of  economic  problems  in  general.  There 
was,  in  England  at  all  events,  no  true  science  of  political 
economy ;  there  could  not  well  be  a  science  of  finance. 
Adam  Smith,  taking  his  cue,  perhaps,  from  the  French 
writers,  for  the  first  time  sought  to  connect  fiscal  questions 
with  those  of  social  economy.  In  his  happy  way  he  com- 
bined the  abstract  discussion  of  fundamental  theories  with 
the  explanation  and  criticism  of  actual  conditions,  avoid- 
ing on  the  one  hand  the  metaphysical  vagaries  of  the 
Physiocrats  and  on  the  other  the  plodding  monotony  of  the 
German  "  cameralistic "  compilations.  But  while  Adam 
Smith  gave  a  decided  impulse  to  the  study  of  fiscal  prob- 
lems on  the  continent,  and  thus  initiated  a  movement  which 


390  ESS  AyS  IN  TAXATION" 


has  resulted  in  the  elaboration  of  the  modern  science  of 
finance,  his  success  in  rousing  a  like  interest  in  England  was 
far  less  marked,  although  his  influence  on  English  fiscal  prac- 
tice was  great.  The  mighty  genius  of  Ricardo,  however, 
turned  at  once  to  the  core  of  the  problem.  He  confined  him- 
self almost  exclusively  to  an  investigation  of  incidence,  re- 
garding a  tax  simply  as  an  addition  to  the  cost  of  production 
and  treating  all  tax  phenomena  as  mere  illustrations  of 
changes  in  value.  Taxation  with  him  became  a  minor  part 
of  general  economic  theory.  So  weighty  was  his  influence 
that  even  Mill,  who  in  other  parts  of  his  Political  Economy 
pursued  a  quite  different  policy,  gave  in  his  fifth  book  noth- 
ing but  a  succinct  analysis  of  the  shifting  and  general  effect 
of  taxation,  scarcely  deigning  to  descend  to  the  facts  of  every- 
day life  or  to  do  more  than  touch  upon  the  difficult  details  of 
principle.  Although  a  few  other  writers  did  more  than  this, 
their  discussions  were  forgotten  amid  the  plaudits  showered 
on  Ricardo  and  Mill.  Thus  it  happened  that,  while  on  the 
one  hand  we  had  numerous  descriptive  works,  written  for 
practical  purposes,  on  the  chief  facts  of  public  finance,  and 
on  the  other  hand  numerous  appendices  to  general  treatises 
on  economics,  dealing  with  a  few  points  in  fiscal  doctrine, 
there  came  to  be  an  almost  complete  divorce  between  fact 
and  theory.  The  practical  writers  did  not  concern  them- 
selves with  theory,  and  the  economists  were  for  the  most  part 
content  to  work  in  what  might  be  called  a  fiscal  vacuum. 
McCulloch  was  the  one  important  writer  to  form  an  excep- 
tion, and  he  was  not  sufficiently  successful  to  find  either 
admirers  or  successors. 

Another  reason  which  may  be  adduced  to  explain  the  more 
rapid  growth  of  the  science  of  finance  in  France  and  in  Ger- 
many was  their  relatively  inferior  fiscal  system.  It  is  not 
the  excellence  but  the  defects  of  economic  life  that  have 
always  led  to  the  elaboration  of  economic  theory.  The 
shortcomings  of  mercantilism  produced  Adam  Smith;  the 
abuses  of  the  ancien  regime  brought  forth  the  Physiocrats  ; 
the  dangers  of  levelling  and  the  evils  of  the  poor  law  gave 


RECENT  EUROPEAN  LITERATURE  391 

us  Malthus ;  the  currency  confusion  and  the  corn  laws  were 
responsible  for  Ricardo.  Had  there  been  no  agricultural,  no 
industrial,  no  commercial  troubles,  we  should  not  have  had 
Mill  and  the  whole  host  of  modern  specialists.  So  with  the 
problems  of  public  finance.  The  abuses  on  the  continent 
were  so  serious  that  they  gave  rise  to  important  political  con- 
tests, and  thus  led  the  scientists  to  attempt  a  general  clearing 
up  of  vexed  questions  in  fiscal  policy.  In  England  tax  prob- 
lems (with  the  exception  of  the  free-trade  controversy,  which 
was  far  more  than  a  mere  matter  of  taxation)  did  not  agitate 
the  people  to  any  great  extent,  and  their  solution  was  con- 
tentedly left  to  the  practical  common  sense  of  the  English 
statesmen.  It  is  significant  that  in  the  one  department  of 
public  finance  which  did  seriously  enter  into  politics,  namely, 
that  of  public  debts,  the  English  writers  have  done  better 
work  than  those  of  the  continent.  But  the  comparative 
excellence  of  the  English  revenue  and  budgetary  system, 
combined  with  the  general  prosperity,  in  themselves  contrib- 
uted to  hinder  the  growth  of  fiscal  theory. 

Of  late  years  the  conditions  have  changed.  The  dispro- 
portionate increase  in  public  expenditures  and  the  immense 
development  of  local  needs  have  materially  strengthened  the 
consciousness  of  fiscal  pressure,  while  the  growth  of  democ- 
racy on  the  one  hand  and  the  complications  of  recent  indus- 
trial development  on  the  other  have  brought  to  the  front 
questions  of  theoretic  justice  which  necessitate  the  revision 
of  fundamental  doctrines.  In  England  as  in  America,  fiscal 
problems  have  become  no  less  important  than  in  continental 
Europe.  It  is  thus  natural  to  expect  henceforth  a  deeper 
study  of  the  subject-matter  by  those  who  in  the  wilder- 
ness of  confusing  party  contests  blaze  out  the  path  of  truth 
and  progress. 

Professor  Bastable's  book  on  Public  Finance 1  is  the  first 
scientific  result  of  this  new  interest  in  fiscal  problems  in  Eng- 

1  Public  Finance.  By  C.  F.  Bastable,  LL.D.,  Professor  of  Political  Econ- 
omy in  the  University  of  Dublin.  London,  Macmillan  &  Co.,  1892. — 8vo, 
xx.,  672  pp. 


392  ESSAYS  IN  TAXATION 

land.  His  volume  marks  a  distinct  epoch  in  the  history  of 
English  economics  ;  for  it  is  the  first  attempt  to  set  before 
English  readers  the  science  of  finance  in  its  modern  garb. 
To  many  it  will  introduce  an  entirely  new  set  of  discussions; 
and  especially  to  the  English  reader  who  is  not  familiar  with 
foreign  tongues,  the  volume  will  be  welcome.  This  will  be 
our  excuse  for  dealing  with  it  so  fully. 

To  all  those  acquainted  with  the  Theory  of  International 
Trade,  published  a  few  years  ago,  as  well  as  with  his  recent 
Commerce  of  Nations,  Professor  Bastable  is  known  as  a  clear 
and  careful  thinker,  without  any  intellectual  vagaries,  and 
with  marked  sobriety  of  judgment.  The  same  traits  con- 
spicuously reappear  in  the  present  volume,  and  they  are  re- 
inforced by  evidence  of  accurate  scholarship  and  familiarity 
with  foreign  literature.  In  order  to  be  sure  of  one's  own 
conclusions,  one  must  first  know  what  others  have  said  ; 
and  it  is  the  neglect  of  this  elementary  rule  that  consigns 
so  much  of  so-called  scientific  writing  to  the  waste-basket. 
It  must  not  be  supposed,  however,  that  Professor  Bastable 
is  a  slavish  adherent  of  his  foreign  predecessors.  His 
volume  is  by  no  means  without  independent  suggestions; 
and  it  is  precisely  this  independence  of  thought  that  invites 
occasional  criticism. 

In  the  first  place,  it  is  to  be  regretted  that  Professor 
Bastable  does  not  employ  the  term  "science  of  finance."  It 
is  true  that  "  finance  "  is  used  in  English  to  include  private 
as  well  as  public  finance,  and  that  several  books  on  "  finance," 
like  those  of  Jevons  and  Giffen,  deal  chiefly  with  monetary 
problems.  This  unclearness,  however,  attaches  to  the  word 
in  foreign  languages  to  almost  the  same  degree.  The  French 
speak  of  la  haute  finance,  and  the  number  of  titles  on  what 
might  be  called  "  private  "  or  "  monetary  "  finance  is  legion ; 
yet  this  has  not  prevented  them  from  using  the  phrase  science 
de  finance  or  science  des  finances,  as  the  technical  term  for  pub- 
lic finance.  The  whole  matter  was  there  discussed  and  laid  to 
rest  years  ago  by  Joseph  Gamier.  In  Italy  and  in  Germany 
the  matter  of  terminology  has  reached  a  similar  settlement. 


RECENT  EUROPEAN  LITERATURE  393 

It  is  therefore  to  be  deprecated  that  Professor  Bastable  should 
not  have  pre-empted  the  phrase  for  English  scientific  use. 
Sooner  or  later  we  shall  have  to  conform  to  the  usage  of  the 
French  and  the  Italians. 

The  introductory  chapter  on  the  history  of  the  science 
gives  a  clear  picture  of  the  main  lines  of  development.  Some 
mention  might,  perhaps,  have  been  made  of  the  discussions  in 
mediaeval  Florence,  which  in  some  points  foreshadow  modern 
doctrines.  Moreover,  if  a  fuller  history  of  the  science  in 
England  is  ever  written,  attention  will  have  to  be  paid  to 
writers  to  whom  may  be  traced  much  of  what  is  to-day  cur- 
rent coin  in  fiscal  discussions.  To  speak  only  of  nineteenth- 
century  authors,  Frend,  Craig,  Buchanan,  Buckingham  and 
Sayer  will  be  able  to  hold  their  own  with  many  of  the  Ger- 
man writers  whom  their  compatriots  delight  to  honor. 

An  important  point  in  which  the  volume  differs  from  some 
others  is  the  inclusion  of  the  subject  of  public  expenditures. 
It  is  a  difficult  and  delicate  task  rightly  to  proportion  the 
space  to  be  devoted  to  this  topic  in  a  work  on  finance. 
From  one  point  of  view  public  expenditure  is  simply  adminis- 
tration :  from  another  point  of  view  it  is  political  economy  in 
the  original  sense  of  the  term.  How  far  government  should 
assume  definite  functions  is  a  problem  of  economic  politics ; 
in  what  manner  it  should  actually  carry  on  these  functions 
is  a  problem  of  administration.  Yet  almost  every  political 
or  administrative  act  involves  some  outlay,  and  is  in  so  far  a 
fit  subject  for  discussion  in  systematic  works  on  finance. 
Professor  Bastable,  in  dealing  with  this  branch  of  his  work, 
has  avoided  on  the  one  hand  unsuitable  details,  and  on  the 
other  mere  commonplaces. 

It  is  in  the  next  three  books  that  are  to  be  found  most  of  the 
controverted  doctrines,  and  it  is  naturally  here  that  the  critic 
will  be  apt  to  take  issue  with  the  author.  Professor  Bastable 
first  takes  up  the  classification  of  public  revenues.  He  sees 
the  inadequacy  of  the  older  continental  division  into  taxes 
and  lucrative  prerogatives  (regalia)  and  correctly  relegates 
the  latter  class  to  the  limbo  of  uberwundener  Standpunkte. 


394  ESS AyS  Iff  TAXATION' 

But  he  is  equally  aggressive  in  his  onslaught  on  the  class 
of  "  fees,"  the  creation  of  which  he  ascribes  to  "  a  want  of 
analytic  power  in  the  originator."  He  simply  distinguishes 
between  taxes  and  what  he  calls  in  some  places  "semi-private 
economic  income,"  and  in  other  places  "public  economic 
income." 

It  will  be  questioned  whether  Professor  Bastable  is  not 
here  taking  a  step  backward.  He  shows,  it  is  true,  the 
many  inconsistencies  of  recent  writers.  But  does  it  not 
seem  unwise  to  cut  the  knot  in  despair  of  untying  it? 
In  refusing  to  acknowledge  fees  as  a  separate  class,  the 
author  only  creates  fresh  difficulties.  Where,  for  instance, 
shall  we  put  school  fees  ?  They  are  surely  not  industrial 
income;  and  Professor  Bastable  himself  would  not  class 
them  among  taxes.  And  where  shall  we  put  the  charges 
for  marriage  certificates,  and  sheriff's  fees,  and  copyright 
payments,  and  a  host  of  other  similar  receipts  ?  The  author 
later  speaks  repeatedly  of  "  economic  receipts "  as  different 
from  fees,  as  well  as  from  taxes,  seeming  to  forget  that  in 
the  earlier  portions  of  the  volume  he  includes  fees  in  the 
"economic  receipts."  Further,  why  speak  so  frequently 
later  of  the  "  fee  principle  "  as  opposed  to  the  "  tax  principle," 
if  fees  do  not  form  a  separate  class  ? 

Again,  Professor  Bastable  sharply  separates  economic  from 
compulsory  receipts  ;  but  he  fails  to  distinguish  between 
different  kinds  of  compulsory  receipts,  and  assumes  that 
all  of  them  are  taxes.  Where,  then,  shall  we  put  fines  and 
penalties  ?  They  are  certainly  compulsory  receipts,  and  just 
as  certainly  not  taxes.  Where,  too,  shall  we  put  special 
assessments,  which  are  completely  ignored  by  him  ?  In  fact, 
it  almost  seems  as  if  the  author,  in  the  endeavor  to  simplify 
matters,  has  really  added  to  our  difficulties. 

A  similar  criticism  may  be  urged  against  his  classification 
of  taxes.  He  objects  to  all  the  recent  methods,  and  reverts 
to  what  is  virtually  Adam  Smith's  classification  into  primary 
and  secondary.  But  it  is  hard  to  see  why  a  tax  on  the 
property  of  a  living  person  should  be  primary,  and  that  on 


RECENT  EUROPEAN  LITERATURE  395 

the  property  of  a  deceased  person,  in  the  shape  of  an  inherit- 
ance tax,  secondary  ;  or  why  a  tax  on  the  business  of  a  cor- 
poration should  be  primary,  and  a  tax  on  the  receipts  of  a 
corporation  secondary.  It  may  also  be  noted  that,  when  he 
calls  attention  to  the  distinction  between  direct  and  indirect 
taxes  made  by  practical  "  financiers,"  his  statement  applies 
only  to  French,  not  to  English  or  to  American  practice. 

The  book  on  the  whole  exhibits  independent  judgment, 
although  in  a  few  instances  the  author  allows  his  German 
models  to  influence  him  unduly  in  matters  of  nomenclat- 
ure. Thus  he  introduces  the  German  distinction  between 
the  "object"  and  the  "subject"  of  taxation,  meaning  by  the 
former  the  thing  on  which,  and  by  the  latter  the  person  on 
whom  the  tax  is  imposed.  This  is  not  English.  When  we 
speak  of  the  subjects  of  taxation,  we  mean  not  the  taxpayers 
(or  "subjects,"  in  Professor  Bastable's  language)  but  the 
phenomena  subjected  to  taxation  (or  "objects,"  in  Professor 
Bastable's  language).  And  when  we  speak  of  the  objects 
of  taxation,  we  commonly  mean  the  aims  of  taxation, 
not  the  things  taxed.  In  other  words,  the  author's 
(German)  "  tax  object "  is  really  the  English  "  subject "  ; 
and  his  "tax  subject"  is  the  English  "taxpayer"  or  "tax- 
bearer,"  as  the  case  may  be.  Again,  the  terms  "forward 
incidence,"  "backward  incidence,"  and  "diffused  incidence" 
are  not  English  ;  moreover,  they  confound  the  terms  inci- 
dence and  shifting.  Finally,  when  Professor  Bastable  em- 
ploys the  word  "rated"  tax  as  opposed  to  "apportioned" 
tax,  he  is  ignoring  the  equivalent  term,  "  percentage  "  tax, 
which  has  become  quite  common,  and  which  clearly  expresses 
the  meaning  on  its  very  face. 

But  all  these  matters,  it  may  be  said,  are  of  minor  impor- 
tance. The  crucial  point  is  not  so  much  the  arrangement 
and  terminology  as  the  substance,  and  in  the  substance  of 
the  book  the  author  must  meet  with  greater  appreciation. 

Passing  over  the  chapters  on  the  state  domain,  the 
industrial  domain,  and  the  state  as  capitalist,  in  which 
he  always  seeks  to  maintain  the  golden  mean  between 


396  ESS  AYS  IN  TAXATION 

the  laissez-faire  theories  of  the  earlier  English  writers  and 
the  semi-socialistic  doctrines  of  the  modern  German  au- 
thors, we  come  to  the  more  difficult  problems  of  taxation. 

A  good  account  is  given  of  the  theory  of  benefit,  which  is 
discarded  as  the  general  basis  of  taxation;  but  less  satis- 
factory is  the  discussion  of  the  theory  of  faculty.  Professor 
Bastable  speaks  of  its  "convenient  vagueness,"  but  does 
not  really  make  any  serious  effort  to  give  a  deeper  analysis 
of  the  doctrine.  He  tells  us  of  Mill's  doctrine  of  ' '  equal 
sacrifice,"  but  does  not  succeed  in  correlating  it  with  the 
doctrine  of  ability.  His  whole  discussion  of  the  theory 
of  progressive  taxation  is  therefore  not  quite  up  to  the 
level  of  recent  investigation.  On  other  points,  too,  he 
is  very  conservative.  He  opposes  the  differentiation  of  the 
income  tax,  which  was  demanded  by  Mill  and  accepted  by 
Disraeli ;  he  seems  to  be  opposed  to  graduation  in  the  inheri- 
tance tax,  which  was  also  demanded  by  Mill  and  which  has 
now  been  definitively  introduced  into  English  practice  ;  and 
he  even  differs  from  the  conservative  French  writers  in  dis- 
approving of  progression  in  the  income  tax  as  a  counterpoise 
to  regression  in  other  taxes. 

On  the  other  hand,  the  discussion  of  the  incidence  of  taxa- 
tion is  good.  The  author  shows  the  weakness  of  both  the 
diffusion  theory  and  the  absolute  theories  of  Smith  and  of 
Ricardo,  and  calls  attention  to  the  complicating  conditions  of 
modern  society.  It  might  be  urged  that  his  analysis  is  not 
rigorous  enough  in  the  case  of  the  taxation  of  profits;  that  not 
enough  attention  is  called  to  the  distinction  between  monopo- 
lies and  competitive  undertakings;  that  the  house  tax  is  viewed 
only  from  the  characteristically  English  point  of  view  as  being 
assessed  on  the  occupier ;  and  that  the  general  capitalization 
theory  is  not  brought  into  due  prominence.  Nevertheless, 
the  treatment  as  a  whole  is  far  superior  to  that  found  in 
most  of  the  manuals  on  public  finance. 

Perhaps  the  least  satisfactory  part  of  the  work  is  the  dis- 
cussion of  universality  of  taxation.  Double  taxation,  as  we 
know,  is  of  importance  chiefly  in  federal  states  ;  and  that 


RECENT  EUROPEAN  LITERATURE  397 

is  no  doubt  the  reason  why  a  book  written  primarily  for 
Englishmen  pays  so  little  attention  to  it.  But  international 
relations  are  here  of  increasing  importance  and  deserve 
more  than  the  half-page  allotted  to  them.  Moreover,  the 
conclusion  itself  is  not  beyond  criticism.  "  The  more  modern 
solution,"  he  says,  "  would  be  that  the  income  tax  should  be 
levied  by  the  country  of  residence,  the  land  or  property  taxes 
by  that  of  situation."  What,  then,  shall  be  done  if  the  income 
is  derived  from  land;  or,  conversely,  if  the  property  consists 
of  intangible  goods  ?  Whatever  we  say  about  this,  it  is  to  be  re- 
gretted that  the  author  passes  over  the  other  forms  of  double 
taxation.  Even  if  there  were  no  space  for  details,  the  main 
points  of  the  controversy  should  at  all  events  h?ve  been 
outlined. 

The  following  book,  on  the  several  kinds  of  taxes,  shows 
the  author  at  his  best.  A  broad  knowledge  of  the  facts  of 
taxation  in  all  the  important  countries,  and  a  wide  acquaint- 
ance with  the  special  literature,  enable  him  to  give  a  concise 
and  clear  account  of  actual  conditions,  as  well  as  of  the  chief 
movements  for  reform.  He  suggests  a  judicious  combination 
of  the  three  principal  forms  of  taxation  as  best  calculated  to 
reach  substantial  justice. 

So  far  as  the  practical  problems  of  American  taxation  are 
concerned,  Professor  Bastable  opposes  the  suggestions  for  a 
direct  income  tax  to  replace  the  local  tax  on  personal  prop- 
erty, and  he  also  deprecates  the  taxation  of  gross  receipts 
of  corporations.  His  statement  that  "  the  most  promising 
sources  of  state  revenue  seem  to  be  the  real  property  and  the 
license  taxes  "  is,  however,  obviously  a  slip.  Americans  will 
also  take  exception  to  the  assertion  that  "  taxation  of  inheri- 
tances is  unsuited  for  a  community  where  the  family  is  the  unit 
of  society  and  property  is  really  held  by  corporations,  not  by 
individuals."  There  is  an  obvious  discrepancy  between  this 
and  the  author's  statement  that  "  taxation  of  corporations  is 
the  taxation  of  their  members."  This  last  statement  again 
is  unclear.  Do  the  "members"  of  a  corporation  mean  its 
stockholders,  or  its  bondholders,  or  both?  The  discussion 


398  ESSAYS  IN  TAXATION 

of  these  questions,  which  have  led  to  some  of  the  most  per- 
plexing problems  of  public  finance  in  America  as  elsewhere, 
ought  not  to  be  so  lightly  "  eliminated." 

We  have  not  hesitated  to  call  attention  to  some  of  the 
minor  defects  in  Professor  Bastable's  volume  or  to  indicate 
a  belief  that  it  will  not  be  found  wholly  satisfactory  for  the 
American  student.  We  must,  however,  remember  that  it 
was  written  primarily  for  Englishmen.  It  is  to  be  hoped 
that  no  one  will  leave  these  criticisms  with  the  idea  that 
the  book  can  be  lightly  cast  aside.  It  is  so  admirable  in 
arrangement,  so  accurate  in  statement,  so  catholic  in  temper, 
so  sagacious  in  judgment,  and  so  broad  in  erudition,  that  it 
will  undoubtedly  give  a  new  impetus  to  the  scientific  study 
of  fiscal  problems  in  England. 


CHAPTER  XIII. 

RECENT   AMERICAN  REPORTS   ON  TAXATION. 

THE  history  of  official  attempts  to  reform  the  systems  of 
state  and  of  local  taxation  in  the  United  States  may  be  divided 
into  two  periods,  the  one  comprising  the  decade  almost  im- 
mediately after  the  completion  of  the  Civil  War,  the  second 
including  the  last  ten  years.  During  the  earlier  period  taxa- 
tion was  light,  and  the  tax  methods  were  not  yet  out  of  touch 
with  the  comparatively  undeveloped  industrial  conditions. 
The  only  report  deserving  of  mention  was  that  of  Connecti- 
cut in  1844,  which  treated  of  some  minor  points.  But  after 
the  close  of  the  war,  the  rapid  advance  in  industry  and 
commerce  made  the  defects  of  the  existing  system  more 
easily  apparent,  thus  leading  to  a  more  extended  discussion. 
The  earlier  New  York  report  of  1863  had  contented  itself 
primarily  with  collecting  facts  and  statistics  ;  but  beginning 
with  1867,  the  Eastern  states,  like  Pennsylvania,  New  York, 
New  Jersey  and  Connecticut,  in  rapid  succession  offered 
suggestions  for  removing  some  of  the  evils  which  were  then 
beginning  to  be  felt. 

I.  New  York  and  Massachusetts. 

The  most  comprehensive  of  these  earlier  documents  is  the 
well-known  double  report  issued  by  New  York  in  1871-72, 
and  written  chiefly  by  Mr.  David  A.  Wells.  This  may  really 
be  called  the  starting-point  in  the  discussion  of  modern  Amer- 
ican problems.  Not  only  did  it  contain  an  immense  mass  of 
information  as  to  actual  facts,  but  it  gave  an  account  of  the 
prevalent  legal  conditions,  which  is  exceedingly  valuable 
even  to-day.  Above  all,  it  attempted  for  the  first  time  to 

399 


400  ESSAYS  IN  TAXATION 

lay  down  certain  guiding  principles.  The  two  practical  ques- 
tions to  which  the  report  primarily  addressed  itself  were  the 
taxation  of  personal  property  in  general  and  of  indebtedness 
in  particular.  It  took  the  position  that  in  order  to  tax  equi- 
tably and  uniformly,  it  is  not  necessary  to  tax  everything ; 
and  it  proposed  to  replace  the  existing  tax  on  personalty  by 
a  taxation  of  house  rent  on  the  occupier. 

Important  as  was  its  treatment  of  practical  problems,  and 
indispensable  as  it  is  to  all  present-day  students,  the  value 
of  the  report  is  somewhat  impaired  by  two  defects  in  theory. 
In  the  first  place,  Mr.  Wells,  like  almost  all  of  the  English 
and  American  economists  of  the  period,  was  an  energetic 
upholder  of  the  benefit  theory  of  taxation — the  doctrine 
that  the  taxes  due  from  each  individual  are  merely  the  price 
paid  for  the  protection  which  government  affords  him. 
Secondly,  Mr.  Wells  espoused  the  general  diffusion  theory, 
maintaining,  as  did  Thiers  before  him,  that  "all  taxes  tend 
to  equate  and  diffuse  themselves  with  unerring  certainty 
and  equality."1  It  was  not  necessary  for  Mr.  Wells  to  take 
this  position,  for  many  of  his  practical  conclusions  might 
have  been  upheld  on  other  grounds. 

The  second  important  report  of  this  earlier  period  is  the 
Massachusetts  report  of  1875,  which  took  issue  with  the  New 
York  commission  on  these  two  points.  The  theory  of  protec- 
tion was  shown  to  be  inadequate  and  untrue  ;  and  for  the  first 
time  in  any  American  official  document  the  doctrine  of  fac- 
ulty was  vigorously  defended.  The  general  diffusion  theory 
was  denied,  and  some  strong  arguments  were  presented  in 
opposition.  In  these  respects,  it  is  unquestionable  that  the 
Massachusetts  report  is  more  in  harmony  with  modern  ideas 
than  are  the  two  New  York  reports. 

As  regards  the  practical  question  at  issue,  however,  the 
Massachusetts  commission  sought  to  uphold  the  existing  sys- 
tem. The  objections  to  the  New  York  proposals  were  those 
which  have  always  been  urged,  and  which  will  always  be 

1  For  a  criticism  of  this  doctrine,  see  my  work  On  the  Shifting  and  7nci- 
dence  of  Taxation,  chap,  i.,  sec.  4. 


RECENT  AMERICAN  REPORTS  ON  TAXATION      401 

urged,  against  any  plan  simply  to  exempt  personal  property 
from  taxation.  To  confess  that  the  tax  on  personalty  is  a 
failure  is  one  thing ;  to  urge  the  repeal  of  the  personal  prop- 
erty tax  without  offering  an  adequate  substitute  is  quite 
another  thing.  What  the  New  York  commission  did  was 
to  suggest  a  partial  substitute  in  the  shape  of  a  tax  on 
rentals.  This  was  a  good  suggestion,  as  far  as  it  went, 
but  it  alone  would  not  suffice.  The  Massachusetts  report 
discerned  this  shortcoming ;  but  because  the  commission 
did  not  see  its  way  to  expand  the  suggestion  or  to  propose 
some  additional  substitute,  it  threw  over  the  whole  New 
York  plan  and  maintained  the  adequacy  of  the  existing 
system.  This  was  illogical.  The  Massachusetts  report,  with 
all  its  clear  and  able  discussions,  must  therefore  be  declared 
distinctly  inferior,  for  all  practical  purposes,  to  its  prede- 
cessor. 

With  the  New  Hampshire  report  of  1876,  which  followed 
in  the  main  the  recommendation  of  the  New  York  commis- 
sion, the  first  period  may  be  said  to  come  to  a  close.  For  the 
next  ten  years  the  interest  in  the  matter  seems  to  have  slum- 
bered. In  1880  New  Jersey,  and  in  1884  West  Virginia,  did 
indeed  issue  reports  ;  but  their  treatment  of  the  subject  was 
not  strong  and  their  influence  was  slight. 

II.  Illinois  and  Maryland. 

The  second  period,  which  began  with  1886,  brought  with 
it  new  problems.  In  addition  to  the  former  questions  of  the 
taxation  of  mortgages  and  of  personal  property  in  general,  the 
public  was  now  beginning  to  consider  the  relations  of  local 
to  state  revenue,  the  growing  intricacies  of  interstate  taxa- 
tion, and  the  questions  connected  with  the  newer  forms  of 
taxation  like  the  corporation  tax  and  the  inheritance  tax. 
The  whole  discussion  was  fast  becoming  more  complex. 

The  Illinois  report  of  1886,  although  slight,  is  important  for 
one  step  in  advance.  It  advocated  a  complete  divorcement 
of  state  revenue  from  local  revenue.  As  the  only  way  to 

2D    , 


402  ESS  Ays  IN  TAXATION 

avoid  the  evils  of  the  system  of  equalization,  the  commission 
suggested  that  the  property  tax  be  confined  to  the  local 
bodies,  and  that  the  state  revenues  be  secured  from  a  system 
of  corporation  taxes.  The  plan  was  not  thoroughly  worked 
out ;  but  the  fruitful  idea  of  separation  or  segregation  of 
sources  of  revenue  was  urged.  This  was  indeed  not  absolutely 
new,  for  the  New  York  state  assessors  had  already  advanced 
the  same  plan  during  the  preceding  decade  ;  but  we  now 
find  it  worked  out  for  the  first  time  in  the  history  of  official 
commissions.  The  limitation  of  the  general  property  tax  or, 
still  better,  of  the  real  property  tax  to  the  use  of  the  local 
bodies  is  a  good  plan,  if  only  for  the  reason  that  it  generally 
is  an  apportioned  tax  ;  for  apportioned  taxes  are  never  suita- 
ble for  state  purposes.  Everywhere  throughout  the  United 
States,  as  in  Europe,  there  exist  two  methods  of  levying 
taxes.  According  to  the  first  method,  state  taxes  are 
assessed  by  state  officers,  in  given  lump  sums  of  so  many 
thousand  dollars  upon  each  county,  and  the  county  then 
divides  this  lump  sum  among  the  ratables.  According 
to  the  second  method,  the  state  officers  simply  fix  upon 
a  certain  quota  or  percentage,  which  is  to  be  imposed 
on  every  hundred  dollars  of  property  throughout  the  state, 
as  valued  by  the  local  assessors.  In  the  apportioned  taxes, 
the  yield  of  the  tax  depends  on  the  quotas  of  the  indi- 
viduals ;  in  the  percentage  taxes,  the  quotas  of  the  individ- 
uals depend  on  the  amount  to  be  raised.  In  most  of  the 
American  commonwealths  the  property  tax  is  apportioned, 
and  the  consequence  is  seen  in  the  crying  inequalities 
between  the  counties  and  in  the  crude  contrivances  of 
boards  of  equalization.  Were  the  real  property  tax  to 
become  local,  as  is  now  the  case  in  England  and  in  Prus- 
sia, we  should  escape  the  inequalities  and  the  makeshifts 
of  boards  of  equalization  with  which  we  are  so  familiar. 
The  same  difficulty  confronts  France  with  her  general  land 
tax.  The  project  of  separating  local  from  state  revenues  is 
hence  a  good  one ;  and  for  this  suggestion  the  report  will 
always  remain  noteworthy. 


RECENT  AMERICAN  REPORTS  ON  TAXATION      403 

Two  years  later,  the  Maryland  report  was  issued.  The 
Maryland  commission  had  the  good  fortune  to  number  among 
its  members  a  student  who  had  given  considerable  attention 
to  the  theory  of  finance,  and  who  was  acquainted  with  the 
history  and  actual  practice  abroad  as  well  as  at  home. 
Professor  R.  T.  Ely  not  only  succeeded  in  inducing  the 
commission  to  accept  some  noteworthy  amendments,  but 
added  a  supplementary  report  of  his  own,  in  which  many 
interesting  and  valuable  ideas  are  to  be  found. 

The  report  proper  points  out  that  the  Maryland  system  of 
direct  taxation  possesses  some  advantages  over  those  of 
neighboring  states.  The  assessors  are  appointed,  thus  min- 
imizing the  danger  of  improper  influences  ;  the  assessments 
are  made  by  county  officers,  thus  avoiding  petty  jealousies 
and  efforts  to  reduce  the  assessments  of  localities  ;  and  the 
same  basis  is  used  for  state  and  county  taxation,  so  that 
no  county  can  reduce  its  assessments  without  reducing  its 
own  resources.  The  disadvantage  of  the  Maryland  system 
in  general  is  that  there  are  no  periodical  assessments.  But 
the  one  defect  which  Marvland  discloses  in  common  with 

tt 

other  states  is  the  inadequacy  of  the  personal  property  tax. 
Although  its  failure  is  notorious,  the  commission  contented 
itself  with  the  proposal  to  exempt  the  book  accounts  of  mer- 
chants when  the  stock  on  the  shelves  is  assessed.  Professor 
Ely,  in  his  supplementary  report,  went  further,  and  advocated 
a  total  exemption  of  personal  property,  which  would  necessi- 
tate a  change  of  the  constitution.  The  chief  proposals  of 
this  supplementary  report  are  :  the  exemption^of  real  estate 
from  state  taxation  ;  taxes  on  corporations  and  an  income  tax 
as  the  chief  sources  of  state  revenue  ;  a  tax  on  real  property 
and  a  tax  on  the  rental  values  of  places  of  business  as  the 
chief  sources  of  local  revenue. 

In  this  scheme  there  are  several  points  to  be  noticed.  The 
plan  of  separating  the  local  and  state  revenues  has  just  been 
discussed.  The  proposition  of  an  income  tax  is  open  to  more 
question.  Many  of  our  tax  reformers  recommend  the  entire 
exemption  of  personal  property.  That  in  itself,  however,  id 


404  ESSAYS  IN  TAXATION 

not  sufficient;  for  it  would  simply  result  in  an  undue  burden 
on  real  estate.  Some  form  of  income  taxation  is  necessary 
in  order  to  reach  those  who  would  otherwise  go  untaxed; 
but  whether  this  should  take  the  shape  of  a  direct  tax 
on  income  is  far  from  certain.  At  all  events  the  discus- 
sion in  the  report  is  not  by  any  means  full  enough.  Fur- 
thermore, even  granting  the  expediency  of  an  income  tax, 
it  is  questionable  whether  it  should  be  a  state  or  a  local  tax. 
The  argument  against  the  income  tax  as  a  local  tax  is  that 
it  might  lead  to  a  loss  of  business  or  of  population  ;  but  the 
same  objection  may  be  made  to  a  state  income  tax  when  com- 
pared with  a  national  income  tax.  The  mere  proposition  of 
an  income  tax  brings  up  a  host  of  questions  which  the  report 
does  not  attempt  to  treat.  Again,  the  recommendation  for 
the  taxation  of  railroads  through  gross  receipts  according  to 
the  Wisconsin  license  fee  system  appears  to  be  a  mistake, 
since  the  just  basis  of  corporate  taxation,  as  of  taxation  in 
general,  is  net  earnings.  The  gross  earnings  tax,  as  we  have 
seen,  is  like  the  tithe  on  lands  ;  it  bears  no  proportion  to 
the  ability  of  the  taxpayer,  because  it  takes  no  account  of 
expenses.  The  most  significant  parts  of  the  supplementary 
report,  it  may  be  said  in  conclusion,  are  the  criticism  in 
detail  of  the  practice  of  the  general  property  tax,  and  the 
elaboration  of  the  idea  of  utilizing  for  sources  of  municipal 
revenue  what  Professor  Ely  terms  the  natural  monopolies.1 
Appended  to  the  report  is  an  interesting,  but  anonymous, 
historical  sketch  of  taxation  in  Maryland. 

III.    Maine,  and  Pennsylvania. 

Partly  as  a  result  of  this  able  Maryland  report,  but  chiefly 
as  an  outgrowth  of  the  discontent  now  manifested  in  other 
sections  of  the  country  as  well,  tax  commissions  soon  mul- 
tiplied. During  the  next  few  years  reports  followed  each 

1  Professor  Ely's  supplementary  report  was  subsequently  reprinted  with 
additions,  and  published  as  his  well-known  work  on  Taxation  in  American 
States  and  Cities. 


RECENT  AMERICAN  REPORTS  ON  TAXATION      405 

other  in  rapid  succession.  As  they  all  belong  to  recent  history, 
it  may  be  well  to  discuss  them  somewhat  more  in  detail. 

In  1890  the  Maine  tax  commission  issued  its  report. 
This  is  valuable  for  its  facts  as  to  the  tax  system.  The 
tables  give  a  digest  of  the  legal  provisions  of  the  most  im- 
portant states  on  the  listing  system,  equalization,  the  poll 
tax,  the  dog  tax,  and  the  taxation  of  railways,  insurance  com- 
panies and  savings  banks.  Some  of  the  tables,  however,  are 
exceedingly  fragmentary.  The  only  one  that  is  complete 
and  trustworthy  is  that  published  as  an  appendix  concerning 
the  tax  on  insurance  companies. 

As  regards  the  report  itself,  not  much  can  be  said  in  com- 
mendation. For  instance,  the  commissioners  confessed  "to 
having  been  compelled  to  acknowledge  the  logical  soundness 
of  many  views  advanced  "  by  recent  economists,  and  yet  they 
say  that  these  views  "  are  at  variance  with  the  conclusions  at 
which  we  have  arrived."  Their  excuse  is  that  it  is  "better 
to  err  upon  the  side  of  conservatism."  The  practical  out- 
come of  the  commissioners'  studies  is  that  the  failure  to  reach 
personalty  may  be  overcome  by  the  plan  of  requiring  sworn 
detailed  inventories  of  all  property  ;  and  the  proposed  law 
contains  provisions  to  this  effect  which  the  commission  calls 
"strong  and  mandatory."  This  is  the  old,  old  story.  Per- 
sonalty escapes  ;  ergo,  try  to  reach  it  by  more  rigid  methods. 
Of  course  the  result  can  be  foretold. 

The  value  of  the  commission's  ideas  may  be  gauged  by 
the  knowledge  displayed  of  the  science  of  finance.  Thus 
we  find  the  remarkable  statement  that  the  single  tax  on  land 
values  is  the  system  which  most  European  countries  have 
adopted.  When  the  present  writer  wrote  to  the  commission 
for  an  explanation,  the  astounding  answer  was  sent  that  the 
commissioners  had  learned  this  fact  from  one  of  his  own 
articles !  Again,  on  the  very  next  page  the  commissioners 
confuse  the  single  tax  on  land  values  with  the  tax  on  real 
estate.  Further,  in  discussing  the  income  tax  (which  they  re- 
ject) they  repeat  the  statement  that  to  tax  property  and  the 
income  from  property  is  intolerable  because  it  would  involve 


406  ESSAYS  IN  TAXATION1 

double  taxation.  When  will  our  commonwealths  learn  to 
put  the  solution  of  such  knotty  questions  into  the  hands  of 
experts,  instead  of  laymen  ? 

The  report  is  redeemed,  however,  by  some  wise  suggestions. 
Thus  in  regard  to  the  taxation  of  mortgages,  it  accepts  in  a 
large  degree  the  contention  of  the  present  writer,  although  it 
quotes  an  entire  paragraph  which  it  erroneously  credits  to 
Amasa  Walker,  who  entertained  the  contrary  opinion.  The 
practical  conclusion  is  the  recommendation  of  the  Massachu- 
setts system,  which  regards  the  mortgage  as  real  estate  and 
divides  the  tax  between  mortgagor  and  mortgagee.  The  com- 
mission, however,  seems  to  be  ignorant  of  the  provisions  of 
the  California  law,  which  avoids  some  of  the  shortcomings 
of  the  Massachusetts  system.  In  regard  to  new  taxes,  the 
commission  proposes  the  collateral  inheritance  tax,  a  tax  on 
all  private  and  special  acts  passed  by  the  legislature,  and  a 
slight  extension  of  the  corporation  taxes.  Some  of  these 
proposed  changes  have  since  been  adopted. 

Of  more  importance  are  the  papers  contained  in  the  re- 
ports of  the  Pennsylvania  revenue  commission  of  1890. 
Pennsylvania  is  the  only  state  in  the  Union  which  has 
seriously  grappled  with  the  problem  of  reaching  the  abilities 
of  those  that  receive  a  revenue  from  other  elements  besides 
real  estate.  Her  revenue  laws  of  the  last  fifteen  years  have 
put  her  easily  into  the  front  rank  of  the  American  common- 
wealths. Yet  just  because  so  much  progress  has  been  made, 
the  demand  for  further  reform  is  stronger  in  Pennsylvania 
than  anywhere  else. 

The  commission  of  eight  members  was  unable  to  agree. 
In  consequence  we  find  four  separate  reports,  of  very  unequal 
value.  The  majority  report,  signed  by  five  members,  is 
the  weakest,  as  it  is  the  shortest.  As  but  little  attention 
was  paid  to  this  report,  we  may  pass  it  by.  The  main 
point  of  the  majority,  who  disclaimed  any  attempt  to  change 
the  system  of  state  taxation,  was  to  improve  the  local  system 
by  compelling  every  person  to  answer  a  list  of  interroga- 
tories as  to  his  personal  property,  and  to  provide  for 


RECENT  AMERICAN  REPORTS  ON  TAXATION       407 

the  publication  of  all  details.  All  moneys  and  credits  were 
to  be  made  taxable ;  every  obligation  or  other  evidence  of  debt 
that  was  not  returned  in  the  assessment  list  was  to  be  un- 
collectible by  suit,  and  all  interest  on  such  debts  was  to  be 
forfeited.  In  other  words,  the  majority  would  institute  a 
system  by  the  side  of  which  the  most  inquisitorial  income 
tax  ever  known  would  be  a  mere  plaything.  To  suppose 
that  Pennsylvania  would  ever  take  such  a  retrograde  step 
was  to  insult  the  judgment  of  her  legislators.  Furthermore, 
all  transportation  and  transmission  companies  were  to  be 
made  liable  to  local  taxation  in  the  following  manner  :  after 
ascertaining  the  average  value  per  mile  of  the  entire  property, 
each  county  was  to  multiply  this  by  the  mileage  in  the  county 
and  to  lay  a  tax  of  four  mills  on  the  result.  This  plan  was 
crude  ;  for  the  large  cities  or  towns  in  which  the  property  or 
terminals  are  of  immense  value  would  get  no  more  revenue 
than  the  little  villages.  Average  value  according  to  mileage 
is  an  inequitable  basis  for  local  taxation,  because  some  local- 
ities will  get  far  more,  and  some  far  less,  than  their  just 
share.1  In  short,  there  is  scarcely  a  recommendation  in  the 
majority  report  which  does  not  fly  in  the  face  of  experience 
and  contradict  the  teachings  of  sound  finance. 

As  a  result,  the  three  minority  reports  savagely  attacked 
the  majority  report.  The  auditor-general  brought  in  a  bill, 
the  main  feature  of  which  was  the  reduction  of  local  taxation 
at  the  expense  of  state  revenue.  He  proposed  that  the  com- 
monwealth treasury  should  assume  a  further  share  of  the 
expenses  of  local  government,  or  that  it  should  relinquish  to 
the  counties  more  of  its  surplus  revenues ;  and  furthermore, 
that  local  taxes  should  be  imposed  on  moneyed  capital,  on 
capital  invested  in  business,  on  shares  of  stock  in  corpora- 
tions, and  on  gross  earnings  of  private  bankers  and  brokers. 

1  The  objection  to  average  value  according  to  mileage  attaches  less  strongly 
to  state  taxation  because  it  rarely  happens  that  nothing  but  the  terminal  is 
in  a  different  state  from  the  line  proper,  and  because  the  question  of  way- 
versus  through-traffic  plays  more  of  a  role  in  interstate  than  in  interlocal 
commerce. 


408  ESSAYS  IN  TAXATION 

Mr.  Albert  S.  Bolles  approved  of  the  income-tax  project  to 
be  mentioned  in  a  moment.  His  report  is  noteworthy  for  the 
few  words  he  has  to  say  on  the  tendency  toward  inequality  as 
the  result  of  the  incidence  of  the  property  tax.  He  main- 
tained that  the  chief  revenue  of  the  state  should  be  from 
railroads,  and  that  most  of  the  other  subjects  of  taxation 
should  be  surrendered  to  the  counties. 

The  chief  part  of  the  report,  both  in  quantity  and  in 
quality,  consists  of  the  three  papers  by  John  A.  Wright. 
These  papers  constitute  a  comprehensive  plan  for  an  adjust- 
ment of  the  whole  system  of  state  and  local  taxation,  and 
deserve  our  attention. 

As  regards  state  taxation,  Mr.  Wright  lays  down  twelve 
principles,  which  may  be  summed  up  in  these  words  :  a  uni- 
versal income  tax,  without  deduction  for  debt,  without 
exemptions,  without  differences  of  rate,  applied  to  indi- 
viduals and  to  firms  as  well  as  to  private  corporations.  He 
showed  that  Pennsylvania  practically  had  indirect  income 
taxes  already  in  the  mercantile  license  taxes  and  the  occu- 
pation taxes,  and  direct  partial  income  taxes  on  bankers, 
brokers  and  certain  corporations.  What  he  desired  was  an 
extension  and  consolidation  of  this  system.  His  plan  is 
that  the  state  should  tax  (1)  the  net  income  of  corpora- 
tions with  a  few  exceptions,  (2)  the  amount  of  sales  of  all 
merchants,  (3)  the  gross  income  of  all  individuals  from 
trades,  professions  and  occupations,  with  provisions  to  pre- 
vent inquisitorial  proceedings.  On  the  other  hand  he  would 
have  the  local  divisions  tax  real  estate,  horses,  mules,  oxen 
and  vehicles,  and  levy  certain  licenses. 

There  are  many  striking  points  in  Mr.  Wright's  papers. 
His  scathing  criticism  of  the  majority  report,  his  apprecia- 
tion of  the  injustice  of  the  property  tax,  his  argument  that 
revenue  and  not  property  should  be  the  basis  of  taxation, 
his  proof  that  an  income  tax  is  really  less  inquisitorial 
than  a  property  vtax,  his  grasp  of  some  of  the  difficulties 
of  interstate  taxation  —  all  these  put  his  three  papers  in 
the  front  rank  of  the  literature  on  American  finance.  On 


RECENT  AMERICAN  REPORTS  ON  TAXATION       409 

the  other  hand,  criticisms  might  be  made  to  show  that  Mr. 
Wright  is  not  acquainted  with  the  latest  results  of  scientific 
thought.  Whole  subjects — such  as  the  question  of  gradu- 
ated taxation,  of  the  distinction  between  permanent  and  pre- 
carious incomes,  and  of  many  problems  of  double  taxation  — 
are  entirely  ignored.  Furthermore,  there  are  evidences  of 
immature,  or  at  all  events  of  not  sufficiently  penetrating, 
thought  —  as  on  the  subject  of  debt  exemption,  where  his 
conclusions  are  not  in  accord  with  the  better  opinion  ;  on 
the  subject  of  incidence,  where  the  diffusion  theory  is  again 
dished  up  ;  on  the  protection  theory  of  taxation  ;  and  on  the 
question  of  deductions  from  income,  where  the  conclusions 
reached  are  arbitrary.  But  with  all  its  faults,  his  report  is 
one  of  the  best  official  documents  hitherto  published  on  the 
subject  of  local  finance. 

Finally,  one  last  word  of  criticism.  Are  not  the  advocates 
of  the  income  tax  in  this  country  somewhat  too  optimistic  ? 
Do  they  reckon  sufficiently  with  the  opposition  to  its  en- 
forcement, and  with  the  probable  inadequacy  of  its  admin- 
istration ?  Is  it  not  far  better  as  a  piece  of  practical  policy 
to  present  the  alternative  plan  of  what  Mr.  Wright  him- 
self calls  indirect  income  taxation  ?  Such  a  system  has 
never  yet  been  worked  out  in  America.  We  are  all  agreed 
in  our  opposition  to  the  property  tax,  and  in  our  desire  to 
abolish  the  tax  on  personalty.  We  are  also  all  agreed  that 
the  resulting  burden  on  real  estate  must  be  diminished. 
If  there  is  no  immediate  prospect  of  an  adequate  taxation  of 
personal  incomes  the  question  therefore  arises :  How  can 
equality  of  taxation  be  attained  ?  It  is  the  one  problem  with 
which  students  of  public  finance  must  grapple.  No  answer 
has  yet  been  given  to  it  in  the  United  States ;  but  in  our 
judgment,  at  least,  the  problem  is  not  insoluble.1 

1  In  a  forthcoming  work  on  The  Income  Tax  and  the  Beform  of  American 
Taxation  by  the  present  writer,  the  whole  question  will  be  fully  treated. 
For  a  discussion  of  the  federal  income  tax  of  1894,  in  some  of  its  rela- 
tions to  state  and  local  finance,  see  the  article  by  the  present  writer  in  the 
Political  Science  Quarterly,  vol.  ix.,  Dec.  1894. 


410  ESS AyS  IN  TAXATION' 


IV.  New  York  and  Ohio. 

The  year  1891  was  marked  by  three  reports,  all  of  them  of 
minor  importance.  The  Boston  tax  commission  dealt  chiefly 
with  that  part  of  the  subject  of  double  taxation  of  peculiar  in- 
terest to  Massachusetts.  The  Oregon  report  was  insignificant 
in  argument  and  content,  with  the  exception  that  it  proposed 
the  abolition  of  the  mortgage-tax  law  —  a  proposition  which, 
notwithstanding  earnest  effort,  was  carried  through  some- 
what later.  The  New  Jersey  commission  handed  in  a  pre- 
liminary and  confessedly  imperfect  report,  composed  largely 
of  extracts  from  previous  reports  and  showing  that  it  had 
not  made  much  independent  study  of  the  subject. 

Passing  over  the  report  of  the  Iowa  revenue  commission  of 
1893,  which  was  of  little  consequence,  we  come  to  the  report 
of  the  Delaware  tax  commission  of  1893,  which  consists  of 
two  parts.  This  is  interesting  as  exemplifying  the  different 
tendencies  at  work  throughout  the  country.  Delaware  raises 
its  state  revenues  from  corporation  taxes  and  licenses,  but 
depends  for  its  local  revenues  upon  the  poll  tax,  the  tax  on 
real  estate,  and  on  a  few  kinds  of  tangible  personalty.  The 
farmers  objected  to  this  and  desired  to  reach  in  some  way 
all  owners  of  personalty.  Hence  the  commission.  The 
majority  report  approves  of  this  desire,  and  recommends  that 
intangible  personalty,  like  money,  investments,  etc.,  be  taxed, 
that  a  tribunal  be  created  for  equalizing  county  assess- 
ments, and  that  the  collateral  inheritance  tax  be  reimposed. 
Although  the  signers  confess  that  the  general  property  tax 
does  not  work  well  they  assert  that  this  is  due  to  "  dis- 
honest citizens,"  and  that  if  certain  kinds  of  property  be 
exempted,  "  cunning  and  scheming  men  "  will  ultimately  re- 
duce the  governmental  revenues  to  an  undue  extent. 

The  minority  report,  on  the  other  hand,  strenuously  objects 
to  the  taxation  of  intangible  personalty.  Almost  the  whole 
of  the  report  is  an  abridgment  of  the  New  York  reports  of 
1871-72  and  of  the  Maryland  report  of  1888,  showing  the 


RECENT  AMERICAN  REPORTS  ON  TAXATION       411 

injustice  of  the  general  property  tax.  The  report  adopts 
in  its  entirety  the  diffusion  theory  of  incidence  and  quotes 
Adam  Smith  as  the  chief  forerunner  of  Thiers  and  Wells ! 
Although  the  commissioners  "  sympathize  with  the  com- 
plaint of  the  Delaware  farmer,"  they  think  that  under  the 
present  system  the  taxes  are  "  more  equally  distributed  than 
in  any  other  state."  It  is  much  to  be  feared  that  the 
Delaware  farmer  will  not  be  satisfied  with  this  Platonic 
"sympathy." 

Far  more  important  than  the  Delaware  report  are  those 
made  to  the  New  York  legislature  in  1893,  the  one  by  the 
counsel  specially  appointed  to  revise  the  tax  laws,  the  other 
by  the  joint  committee  of  the  Senate  and  Assembly.  Both 
the  counsel  and  the  committee  chose  to  present  results  rather 
than  extended  arguments. 

The  counsel  affirm  that  they  have  studied  not  only  the 
public  documents  of  other  states,  but  also  the  general  litera- 
ture of  the  subject,  including  the  views  of  the  leading  political 
economists  of  the  day.  They  suggest  that  the  information 
so  obtained  be  collated  for  the  use  of  the  public  for  further 
reference ;  but  in  the  present  report  they  prefer  simply  to 
present  their  conclusions,  proceeding  on  the  principle  of 
proposing  nothing  which  has  already  been  before  the  legis- 
lature and  which  has  failed  of  adoption.  Thus  they  object 
to  the  "  building  occupancy  "  tax  because  the  legislature  re- 
fused to  adopt  it  in  1872.  If  this  principle  were  consistently 
carried  out,  there  would  be  little  chance  for  human  progress ; 
for  most  innovations  are  at  first  opposed,  and  the  mere  fact 
that  the  legislature  has  in  former  years  rejected  a  plan  is 
neither  a  proof  that  they  would  reject  it  to-day,  nor  a  reason 
why  the  advisers  of  the  legislature  should  refuse  to  consider 
its  feasibility.  The  counsel  also  discuss  new  plans.  They 
object  to  the  single  tax  and  even  to  the  tax  on  real  estate 
alone,  because  they  cannot  see  the  equality  and  justice  of 
levying  all  burdens  on  the  real  estate  owner.  They  object 
to  the  income  tax  as  too  inquisitorial,  and  at  present  quite 
inadmissible.  At  the  same  time  they  strenuously  oppose 


412  ESSAYS  IN  TAXATION" 

the  "listing"  system,  although  they  call  attention  to  the 
defects  of  the  personal  property  tax. 

What,  then,  is  to  be  done  to  secure  equality  of  taxation  ? 

The  general  property  tax  is  to-day  supplemented  by  the 
corporation  tax  and  the  inheritance  tax.  The  counsel  object 
to  any  great  increase  in  the  corporation  tax  on  the  ground 
that  this  ought  to  carry  with  it  an  exemption  of  corporations 
from  local  taxation,  as  in  Pennsylvania  —  a  plan  which  they 
think  unwise,  because  the  local  bodies  are  not  willing  to  lose 
so  large  a  source  of  revenue.  Again,  they  oppose  a  tax  on 
corporate  bonds :  first,  because  it  is  at  present  legally  impos- 
sible to  tax  bonds  held  outside  of  the  state ;  and,  secondly, 
because  bonds  are  already  taxable  to  the  owners  as  personalty. 
The  only  suggestions  made  as  to  corporate  taxation  are  : 
to  extend  to  other  corporations  the  machinery  of  collection 
applied  to  the  taxation  of  bank  shares,  and  to  apply  the 
earnings  tax  on  transportation  companies  to  foreign  as 
well  as  to  domestic  corporations.  As  to  the  inheritance 
tax,  the  counsel  content  themselves  with  a  slight  change 
in  restricting  exemptions.  While  apparently  regarding 
with  favor  the  settlement  of  the  mortgage-tax  question  as 
in  Massachusetts  and  California,  they  refrain  from  any 
recommendation,  because  the  legislature  has  heretofore  con- 
sidered the  matter  and  taken  no  action.  They  do,  however, 
propose  a  tax  on  deposits  of  savings  banks  above  a  certain 
limit.  Finally,  they  object  to  "  local  option,"  because  they 
clearly  see  that  it  simply  means  taxation  of  realty  alone ; 
and  this,  they  maintain,  should  be  done  by  a  general  statute 
or  not  at  all. 

Since,  therefore,  the  present  system  of  taxation  is  unjust, 
they  think  that  one  of  two  courses  must  be  adopted  :  either 
personalty  should  be  entirely  exempt,  or  substantially  all 
personalty  should  be  taxed.  The  first  plan  seems  too  radi- 
cal ;  therefore  we  must  try  to  reach  personalty.  This  may 
be  done  by  improving  the  machinery,  by  centralizing  the 
administration,  and  by  providing  for  state  equalization  of 
personalty  as  well  as  of  realty. 


RECENT  AMERICAN  REPORTS  ON  TAXATION       413 

The  report  of  the  counsel  is  timid  and  conservative  ;  but 
it  at  least  possesses  the  distinction  of  not  falling  into  the 
gross  mistakes  which  so  many  of  our  recent  state  commis- 
sions have  committed.  The  report  of  the  legislative  commit- 
tee, on  the  other  hand,  is  not  only  in  the  main  sensible,  but 
also  radical. 

In  the  first  place,  the  committee  agree  with  the  counsel  in 
opposing  the  income  tax  and  the  principle  of  local  option  in 
taxation.  Secondly,  in  opposition  to  the  counsel,  they  main- 
tain (1)  that  the  taxation  of  savings-bank  deposits  would 
be  an  undesirable  interference  with  the  savings  of  thrifty 
people ;  (2)  that  the  equalization  of  taxes  on  personalty 
"would  legalize  a  system  of  official  guessing,"  and  would 
only  intensify  the  conflict  between  the  local  divisions ;  but 
(3)  that  a  state  tax  on  mortgages  would  be  a  desirable  inno- 
vation, producing  even  at  a  rate  of  only  one-half  of  one  per 
cent  nearly  five  millions  of  dollars.  Thirdly,  they  pro- 
pose certain  changes  in  the  inheritance  and  corporation 
taxes,  calculated  to  increase  their  yield  and  to  equalize  the 
burdens.  The  progressive  principle  is  to  be  applied  to  the 
inheritance  tax,  and  the  exemption  of  real  estate  is  to 
be  abolished  when  the  estate  exceeds  $50,000.  The 
virtual  exemption  of  heavily  bonded  corporations  is  to  be 
removed  by  assessing  a  corporation  tax  in  such  cases  upon 
the  par  value  of  the  stock,  instead  of  on  the  market  value. 
Finally,  the  principle  is  laid  down  of  a  definite  separation  of 
the  state  and  local  revenues.  The  changes  above  suggested 
in  the  state  taxes  will,  they  believe,  suffice  to  meet  all  state 
expenses.  Real  estate  is  to  be  left  to  the  local  bodies, 
and  the  whole  question  of  local  taxation  may  then  be  dis- 
cussed by  itself. 

It  will  be  seen  that  the  committee's  report  is  the  more 
important.  The  first  condition  of  improvement  in  our 
tax  methods  is  to  be  found  in  the  abolition  of  the  prop- 
erty tax  as  a  state  tax.  The  idea  is  not  new ;  for,  as  we 
have  learned,  it  has  been  urged  for  over  twenty  years  in  the 
reports  of  the  New  York  state  assessors  and  of  officials  in 


414  ESSAYS  IN  TAXATION 

other  states  like  Illinois  and  Maryland  ;  and  the  plan,  as  we 
know,  is  in  practical  operation  in  Delaware.  This  is,  how- 
ever, the  first  time  that  the  suggestion  has  been  adopted  in 
an  important  commonwealth  by  a  committee  of  the  legis- 
lature itself. 

The  suggestion  of  a  graduated  inheritance  tax  is  in  har- 
mony with  growing  public  sentiment ;  but  the  proposed  plan 
of  dealing  with  corporations  is  not  so  satisfactory.  If  the 
heavily  bonded  corporation  is  so  successful  that  it  pays  high 
dividends,  the  adoption  of  the  par  value  instead  of  the 
market  value  of  the  stock  as  a  basis  would  only  intensify 
the  present  inequality.  On  the  other  hand,  the  counsel  are 
entirely  too  timid  in  deprecating  a  tax  on  corporate  bonds. 
The  taxation  of  corporations  on  an  assessment  equal  to  the 
value  of  their  stock  and  bonds  would  remove  the  legal 
obstacles,  and  would  restore  equality  of  taxation  as  between 
the  various  classes  of  corporations.  Neither  the  committee 
nor  the  counsel,  however,  see  that  no  form  of  corporate 
taxation  can  satisfy  the  demands  of  justice  until  the  prob- 
lems of  double  taxation  are  attacked ;  and  that  no  adequate 
solution  can  be  found  until  interstate  agreements  are  adopted. 
It  is  to  be  deplored  that  no  suggestion  of  this  kind  is  to 
be  found  in  either  of  the  reports.  The  tax  on  mortgages 
proposed  by  the  committee,  is  a  makeshift.  They  forget 
that  to  tax  the  mortgagee  on  the  mortgage  and  the  mort- 
gagor on  the  whole  value  of  the  land  is  unendurable  double 
taxation.  Were  the  mortgagor  to  be  taxed  only  on  the 
unencumbered  portion  of  his  property,  as  is  the  case  in 
many  other  states,  the  tax  on  mortgages  would  be  less  objec- 
tionable— although  even  then  the  plan  hinted  at  by  the 
counsel  would  be  preferable. 

We  come  now  to  what  is  perhaps  the  best  of  recent  reports 
—  that  of  Ohio.  The  tax  commission  of  Ohio,  appointed 
in  April,  1893,  has  evidently  turned  to  good  use  some 
of  the  recent  scientific  writing  on  public  finance.  Most  of 
the  theories  advanced  are  in  accord  with  the  sounder  views, 
and  everywhere  an  endeavor  is  made  to  conform  to  the  neces- 


RECENT  AMERICAN  REPORTS  ON  TAXATION      415 

sities  of  practical  reform.  The  commission  tells  us  again 
how  utterly  inefficacious  the  listing  system  has  been  in  Ohio. 
The  "  tax-inquisitor  "  law  produces  less  than  two  per  cent  of 
the  taxes,  the  greater  part  of  which  is  paid  by  the  rural 
counties ;  while  intangible  property  altogether  pays  only 
nine  and  four-tenths  per  cent  of  the  state  taxes.  The  com- 
mission calls  attention  to  the  fact  that  this  is  simply  a  revival 
of  mediaeval  conditions,  and  recommends  a  complete  repeal  of 
the  act.  The  attempt  to  reach  intangible  property  directly  by 
taxation  is  declared  impracticable ;  and  the  absurdity  of  the 
law  is  shown  by  the  fact  that  the  personal  property  tax  in  Ohio 
costs  in  some  of  the  counties  thirty-four  per  cent  to  collect. 

The  commission,  however,  strongly  maintains  that  as  the 
only  just  principle  of  taxation  is  that  of  contribution  accord- 
ing to  ability,  an  effort  must  be  made  to  reach  intangible 
personalty  in  some  other  way.  In  a  well-devised  system 
taxation  must  on  the  whole  be  proportional  to  income  or 
earnings,  and  yet  the  direct  income  tax  is  virtually  impos- 
sible in  this  country  as  a  state  tax.  The  report  is  in  fact 
noteworthy :  first,  because  it  accepts  the  principle  of  faculty, 
while  abandoning  property  as  a  test  of  faculty;  and  secondly, 
because  although  it  prefers  income  as  a  better  indication  of 
faculty,  it  recognizes  the  necessity  of  getting  at  the  income 
indirectly. 

Their  solution  of  the  problem  may  be  summed  up  in  a 
few  words :  taxation  of  real  estate  and  tangible  personalty ; 
an  inheritance  tax,  increased  and  extended ;  a  franchise  tax 
on  corporations  and  enterprises ;  and  the  beginnings  of  a 
system  of  business  taxes,  through  a  tax  on  transfers  of  prop- 
erty, on  law  proceedings,  etc.  A  valuable  account  is  given 
of  the  taxation  of  corporate  enterprises  in  Ohio,  in  which 
it  is  shown  that  while  banks  pay  from  seventeen  to  twenty- 
three  per  cent  of  their  net  income,  and  city  real  estate  from 
fourteen  to  twenty -five  per  cent  of  its  rentals,  railroads  pay 
only  five  to  twelve  per  cent.  This  is  one  of  the  most  inter- 
esting features  of  the  report.  The  assessed  valuation  of  rail- 
road property  is  compared  with  that  of  1892,  and  an  attempt 


416  ESS AFS  IN"  TAXATION" 

is  made  to  get  at  the  true  valuation  based  on  a  comparison 
of  gross  and  net  earnings,  stock  exchange  quotations  and 
bonded  indebtedness.  The  results  are  surprising,  but  seem 
to  be  sound.  In  fact  this  part  of  the  report  abounds  in 
intelligent  comment.  The  commission  earnestly  contends  that 
the  correct  measure  of  corporate  ability  for  purposes  of  taxa- 
tion is  income  or  earning  capacity;  and  it  recommends  a  system 
of  corporate  taxation  based  on  the  more  approved  methods. 
Altogether,  the  report  of  the  Ohio  commission  is  one  of  the 
most  cheering  evidences  of  the  growth  of  saner  and  more 
enlightened  views  on  the  subject  of  taxation.  It  does  not 
exhaust  the  subject,  but  it  certainly  goes  a  great  way  toward 
the  improvement  of  existing  conditions. 

V.     Massachusetts  and  Pennsylvania. 

The  next  report  is  that  of  the  Massachusetts  commission 
of  1894.  The  Massachusetts  system  has  long  been  marked 
by  several  peculiarities.  It  taxes  incomes ;  does  not  tax 
mortgage  notes  on  real  estate  ;  and  does  tax  shareholders 
of  foreign  corporations,  whether  or  not  such  corporations 
are  taxed  by  their  own  states.  The  special  committee  de- 
voted a  considerable  share  of  its  hearings  and  report  to  the 
latter  point,  but  decided  for  the  continuance  of  the  present 
practice.  As  a  matter  of  fact,  although  the  report  contains 
a  few  good  suggestions,  it  discloses  very  little  acquaintance 
with  modern  views,  and  is  distinctly  inferior  in  this  respect 
to  that  of  the  Ohio  commission.  Thus,  for  instance,  the 
report  does  not  attempt  to  recommend  any  more  comprehen- 
sive system  of  corporate  taxation,  such  as  exists  in  Pennsyl- 
vania and  New  York,  and  it  does  recommend  a  continuance 
of  the  income  tax.  In  arguing  the  latter  point,  it  advances 
the  remarkable  statement  that  any  attempt  to  abolish  the 
income  tax  in  England,  Germany  and  France  would  probably 
result  in  a  revolution.  When  we  reflect  that  the  French 
Revolution  resulted  in  the  abolition  of  their  income  tax  and 
that  it  has  been  impossible  since  the  Revolution  to  create  a  new 


RECENT  AMERICAN  REPORTS  ON  TAXATION      417 

income  tax,  the  force  of  this  statement  becomes  apparent. 
We  are  thus  prepared  for  the  final  recommendation  of  the 
committee,  which  is  nothing  more  nor  less  than  the  intro- 
duction of  the  listing  system  as  the  best  solution  of  the 
Massachusetts  tax  problems.  This  is  the  sorry  outcome  of  a 
long  inquiry. 

On  the  other  hand,  there  are  some  interesting  points  in  the 
report.  It  shows  how  impracticable  the  single-tax  theory 
is ;  for  according  to  the  testimony  of  the  single  taxers 
themselves,  it  would  be  impossible  to  raise  sufficient  revenue 
in  the  farming  counties ;  and  the  poor  towns  would  have  to 
receive  aid  from  the  more  prosperous.  The  committee  per- 
tinently ask  :  Where  is  this  aid  to  come  from? 

The  committee  strenuously  advocate  the  introduction  of 
a  graduated  inheritance  tax.  They  object  to  the  exemption 
of  municipal  bonds  from  taxation ;  but  on  this  topic  there 
is  much  to  be  said  on  both  sides.  Finally,  they  call  atten- 
tion to  some  of  the  results  of  the  exemption  of  mortgage 
notes,  and  show  that  the  advantages  to  the  mortgagor  have 
been  greatly  exaggerated. 

The  report,  therefore,  is  a  mixture  of  good  and  bad  ideas. 
It  does  not  propose  any  comprehensive  reform  and  it  does 
not  grapple  with  the  subject  in  all  its  bearings.  It  is  on  the 
whole  a  distinct  disappointment,  and  students  will  derive 
more  profit  from  the  testimony  than  from  the  report  itself. 
As  might  have  been  expected,  there  was  little  prospect  of 
the  adoption  of  the  committee's  retrograde  recommendations ; 
while  the  better  propositions,  like  those  for  an  inheritance 
tax,  attracted  considerable  attention  and  were  subsequently 
enacted  into  law.  Massachusetts  has  much  to  learn  before 
putting  herself  on  a  par  with  Pennsylvania. 

We  come  finally  to  a  series  of  reports  of  peculiar  interest 
—  those  of  the  Pennsylvania  tax  conference.  The  confer- 
ence was  formed  on  somewhat  novel  lines.  As  a  result  of 
the  tax-commission  report  of  1890,  a  bill  was  introduced  in 
the  Pennsylvania  legislature,  but  met  with  opposition  suffi- 
cient to  defeat  it.  It  was  thereupon  proposed  by  one  of  the 

2E 


418  ESSAYS  IN"  TAXATION 

senators  that  representatives  of  the  different  interests  of  the 
state  be  called  together  to  ascertain  the  facts  of  taxation 
in  Pennsylvania  as  compared  with  other  states,  and  to  report 
a  bill  which  would  be  satisfactory  to  these  interests.  As 
a  consequence,  twenty-four  representatives  of  agriculture, 
transportation,  labor,  commerce  and  manufactures,  and  the 
tax  officials  themselves,  met  at  Harrisburg  in  February, 
1892.  This  voluntary  conference  appointed  committees: 
one  to  examine  and  report  upon  the  value  of  the  various 
classes  of  property  in  the  commonwealth  ;  another  to  examine 
the  tax  laws  of  all  the  states ;  and  a  third  to  formulate  the 
statement  of  principles  on  which  the  reform  should  be  based. 
After  making  some  elaborate  investigations,  the  committees 
began  to  announce  their  results.  The  first  to  bring  in  a 
report  was  the  committee  on  tax  laws.  This  report,  pre- 
sented in  1892,  is  valuable  chiefly  for  the  three  tables  which 
digest  the  tax  laws  of  the  Union  and  which  give  in  compact 
form  the  essential  facts.  The  committee  itself  make  but  few 
recommendations  —  generally  of  a  sensible  character.  Some 
of  their  statements  are  erroneous,  as  for  instance,  when  they 
say  that  an  income  tax  has  no  place  in  the  fiscal  policy  of 
any  American  state.  The  committee  also  repeat  the  old 
error  that  the  property  tax  is,  and  ought  to  be,  based  upon 
the  theory  of  protection.  They  maintain,  however,  that  an 
income  tax  will  not  be  equitably  levied  by  elected  officials, 
and  that  a  single  tax  on  land  values  will  increase  the  burden 
on  the  poor.  They  find  the  best  feature  of  the  Pennsylvania 
system  as  compared  with  the  systems  of  other  states,  to 
be  in  the  separation  of  the  sources  of  state  and  local  taxa- 
tion. The  committee  refrain  from  making  any  specific 
recommendations  because  the  members  have  not  studied 
long  enough  to  enable  them  to  effect  a  complete  harmony 
of  views.  The  report,  therefore,  is  primarily  important 
for  its  presentation  of  facts. 

The  next  to  report  was  the  so-called  commission  on  valu- 
ation and  taxation.  It  attempted  to  ascertain  the  facts  not 
only  as  to  assessed  valuation,  but  also  as  to  actual  value. 


RECENT  AMERICAN  REPORTS  ON  TAXATION      419 

This  it  sought  to  accomplish  by  taking  the  insurance 
valuations  on  insurable  property,  and  by  making  special 
investigations  through  separate  agents.  The  preliminary 
report,  which  was  first  presented,  contains  interesting  fig- 
ures, some  of  which  have  been  commented  upon  in  other 
parts  of  this  volume.  Many  tables  are  given  as  to  the 
value  of  different  kinds  of  property,  but  no  attempt  is 
made  to  draw  any  inferences,  and  the  endeavor  to  ascertain 
actual  values  is  often  acknowledged  to  be  only  moderately 
successful.  The  valuation  of  property  based  on  insurance 
turned  out,  as  might  have  been  anticipated,  to  be  unsatisfac- 
tory. The  remainder  of  the  report,  in  addition  to  a  state- 
ment of  the  existing  revenues  of  Pennsylvania,  which  are 
put  in  a  very  clear  form,  is  devoted  to  a  short  description 
of  property  in  the  state  exempt  from  taxation. 

During  1893  and  1894  followed  reports  on  the  valuation 
of  railroads,  other  transportation  companies,  manufactur- 
ing corporations  and  real  estate.  At  the  conclusion  of  its 
labors  the  conference  submitted  a  bill,  instead  of  a  general 
report.  Its  important  features  may  be  summarized  as 
follows  :  — 

1.  It  separates  state,  county  and  local  sources  of  revenue. 
The  state  taxes  on  inheritances,  on  commissions,  on  municipal 
loans  and  on  certain  licenses,  as  well  as  the  local  real  estate 
tax  are  left  unchanged.     But   the   bill  transfers  from  the 
state   to   the   counties   the   important    mercantile    licenses, 
several  other  licenses,  the  stamp  taxes,  the  fees  of   county 
officers,  the  carriage  tax  and  a  part  of  the  personal  prop- 
erty tax  ;  and  transfers  from  the  counties  to  the  minor  civil 
divisions  the  tax  on  horses  and  cattle.     It  imposes  a  new, 
but  slight,  county  tax  on  the  enrolment  of  corporations. 

2.  It  changes  the  state  taxes  on  corporations.     Corpora- 
tions are  taxed  on  the  value  of  their  property,  determined 
by  adding   to   the   market  value  of   the   share   capital   the 
market  value  of  the  funded  debt  when  less  than  par,  or 
the  par  value  of  the  debt  when  the  market  value  is  par  or 
more  than  par.     From  this  aggregate  are  deducted  (a)  the 


420  ESSAYS  IN  TAXATION 

value  of  real  or  personal  property  legally  exempt  by  federal 
law,  (6)  the  assessed  value  of  the  real  estate  locally  taxable, 
and  (c)  the  value  of  the  real  or  tangible  personal  property 
without  the  state.  In  the  case  of  corporations  whose  lines  or 
operations  extend  beyond  the  state,  only  the  proportionate 
part  within  the  state  is  taxed.  Foreign  corporations  are 
taxed  in  the  same  way  except  that  they  are  not  allowed 
any  deduction  for  their  property  without  the  state.  This 
system  is  to  apply  to  all  corporations,  except  manufacturing 
corporations,  banks,  building  and  loan  associations  and  in- 
surance and  trust  companies.  The  latter  are,  however,  taxed 
separately  on  their  capital  stock,  except  that  insurance  com- 
panies are  taxed  on  premiums. 

The  bill,  so  far  as  it  goes,  is  in  almost  every  respect  in 
harmony  with  the  more  modern  views.  The  only  criticism 
that  might  be  urged  is  the  exemption  of  real  estate  locally 
taxable,  which  is  unnecessary,  because  the  state  and  the 
local  bodies  are  not  identical,  but  concurrent,  tax  jurisdic- 
tions. The  bill  was  introduced  into  the  legislature  in  1895, 
but  was  hotly  opposed  by  certain  manufacturing  corporations 
and  finally  failed  to  become  law. 

It  is  as  yet  too  soon  to  judge  of  the  ultimate  result  of  the 
work  of  the  conference.  It  has  been  a  novel  experiment, 
based  entirely  on  voluntary  action,  and  the  work  has  certainly 
been  taken  up  in  the  proper  spirit.  If  the  practical  results 
thus  far  achieved  do  not  amount  to  very  much,  it  is  probably 
due  to  the  weakness  of  human  nature  and  to  the  inherent 
difficulties  of  the  task.  Pennsylvania  has,  however,  always 
been  at  the  head  of  tax  reform  in  the  United  States  ;  and 
we  may  confidently  expect  some  good  results  in  the  future 
from  the  labors  of  the  conference. 

Slowly,  but  surely,  we  are  moving  toward  a  readjustment 

of  the  American  system  of  taxation.     Its  ultimate  form  can 

j  already  be  faintly  discerned  :  separation  of  state  and  local 

revenues ;    state  revenues  derived  chiefly  from  corporation 

',  and   inheritance   taxes;    local   revenues   derived   from   real 

'L  estate   and   from  the    other    elements    of    taxable    /acuity. 


RECENT  AMERICAN  REPORTS  ON  TAXATION      421 

The  majority  of  the  recent  reports  recognize  the  fact  that 
the  problem  cannot  be  solved  merely  by  exempting  person- 
alty. They  see  that  the  income  tax,  as  a  state  or  local  tax, 
is  no  solution ;  and  are  groping  after  adequate  substi- 
tutes. That  some  form  of  mortgage  taxation  will  be  a  part 
of  the  new  system,  is  possible  ;  that  a  more  refined  system 
of  corporation  and  inheritance  taxation  will  reach  other  im- 
portant classes  of  personalty,  is  probable  ;  that  additional 
taxes  must  be  imposed,  designed  to  reach  the  remainder  of 
individual  faculty  —  and  based  perhaps  on  outward  signs 
and  presumptions  —  is  not  yet  recognized  by  many  of  the 
reports.  The  recognition  of  this  fact,  however,  will  come 
as  soon  as  the  demand  for  the  abolition  of  the  personal 
property  tax  has  made  more  headway.  Let  us  be  thankful 
at  all  events  that  so  many  of  the  recent  reports  take  a  step 
in  the  right  direction.  They  do  not  give  us  by  any  means 
all  that  is  needed  ;  but  the  adoption  of  their  fundamental 
proposals  would  make  future  reforms  less  difficult. 


422  ESSAYS  IN  TAXATION 


BIBLIOGRAPHY  OF   AMERICAN   REPORTS  ON   TAXATION. 

1.  Report  of  the  Committee  appointed  by  the  General  Assembly  [of 

Connecticut]  to  inquire  into  the  subject  of  Taxation.  New 
Haven,  1844. 

2.  Report  on  the  State  Assessment  Laws  by  the  Joint  Select  Committee 

appointed  by  the  Legislature  of  1862  [of  New  York] .  Published 
as  appendix  to  Street,  A  Digest  of  Taxation  in  the  States.  Albany, 
1863. 

3.  Report  of  the  Auditor-General,  Secretary  of  the  Commonwealth,  and 

State  Treasurer,  on  the  Tax  Laws  of  the  State  [of  Pennsylvania]. 
Harrisburg,  1867. 

4.  Report  of  Hon.  Charles  S.  Ogden  [and  others]  to  the  Legislature  of 

New  Jersey  [on  Taxation].     Trenton,  1868. 

5.  Report  of  the  Special  Commission   [of  Connecticut]  on  Taxation. 

New  Haven,  1868. 

6.  Report  of  the  Commissioners  to  revise  the  Laws  for  the  Assessment 

and  Collection  of  Taxes  [in  New  York].     Albany,  1871. 

7.  Second  Report  of  the  Commissioners  to  revise  the  Laws  for  the 

Assessment  and  Collection  of  Taxes  in  the  State  of  New  York. 
Albany,  1872. 

8.  Report  of  the  Treasurer  and  Auditor  [of  Virginia]  to  the  House 

of  Delegates  on  the  subject  of  Taxation.    Richmond,  1874. 

9.  Report  of  the  Joint  Special  Committee  on  the  subject  of  Property 

liable  to  and  exempt  from  Taxation,  made  to  the  General  Assem- 
bly of  the  State  of  Rhode  Island.  1875. 

10.  Report  of  the  [Massachusetts]  Commissioners  appointed  to  inquire 

into  the  Expediency  of  revising  and  amending  the  Laws  relating 
to  Taxation  and  Exemption  therefrom.  Boston,  1875. 

11.  Report  to  the  Legislature  of  New  Hampshire  of  Hon.  George  Y. 

Sawyer,  Chairman  of  the  Board  of  Commissioners  to  revise  .  .  . 
the  Tax  Laws  of  the  State,  etc.  Concord,  1876. 

12.  Report  of  the  Special  Tax  Commission  of  the  State  of  New  Jersey. 

New  Brunswick,  1880. 

13.  Report  of  the  Special  Commission  [of  Connecticut]  to  inquire  into 

the  Conditions  and  Workings  of  the  Tax  Laws.  New  Haven, 
1881. 

14.  Decisions,  Opinions  and  Statistics  compiled  by  the  Tax  Commission 

with  their  Report.  Presented  to  the  legislative  Joint  Tax  Com- 
mittee of  New  York.  3  Parts.  Albany,  1881. 

15.  West  Virginia  Tax  Commission.     Preliminary  Report.     Wheeling, 

1884. 

16.  West  Virginia  Tax  Commission.    Final  Report.    Wheeling,  1884. 


RECENT  AMERICAN  REPORTS  ON  TAXATION      423 

17.  Report  of  the  Revenue  Commission  [of  Illinois].    Springfield,  1886. 

18.  Report  of  the  Board  of  Commissioners  of  Assessment  and   Taxa- 

tion in  the  State  of  Oregon.     Salem,  1886. 

19.  Report  of  the  Tax  Commission  of  Baltimore.     Baltimore,  1886. 

20.  Report  of  the  Special  Commission  on  the  subject  of  Taxation  [in 

Connecticut].     New  Haven,  1887. 

21.  Report  of  the  Maryland  Tax  Commission  to  the  General  Assembly. 

Baltimore,  1888. 

22.  Report  of  Special  Committee  of  the  Boston  Executive   Business 

Association  on  Taxation.     Boston,  1889. 

23.  Report  of  the  Revenue  Commission  appointed  by  the  .  .  .  Legis- 

lature of  Pennsylvania.     Philadelphia,  1890. 

24.  Report  of  the  Special  Tax  Commission  of  Maine.     Augusta,  1890. 

25.  Preliminary  Report  of  the  [New  Jersey]  Commission  on  Taxation. 

Trenton,  1891. 

26.  Report  of  the  [Oregon]  Special  Senate  Committee  on  Assessment 

and  Taxation.     Salem,  1891. 

27.  Report  of  the  [Boston]  Special  Commission  on  Taxation.    Boston, 

1891. 

28.  Report  of  the  [United  States]  Select  Committee  to  investigate  Tax 

Assessments  in  the  District  of  Columbia.     Washington,  1892. 

29.  Report  of  the  Revenue  Commission  of  the  State  of  Iowa.      Des 

Moines,  1893. 

30.  Report  of  the  Delaware  Tax  Commission  to  the  General  Assembly. 

2  parts.     Wilmington,  1893. 

31.  Report  of  the  Tax  Commission  of  Ohio.     Cleveland,  1893. 

32.  Report  of  the  [New  York]  Joint  Committee  of  the  Senate  and  Assem- 

bly relative  to  Taxation  for  State  and  Local  Purposes.     With 
Testimony.     New  York,  1893. 

33.  Report  of  Counsel  to  revise  the  Tax  Laws  of  the  State  of  New  York. 

Albany,  1893. 

34.  Hearings  before  the  [Massachusetts]  Joint  Special  Committee  .  .  . 

relating  to  Taxation.     Boston,  1893. 

35.  A  Full  Report  of  the  [Massachusetts]  Joint  Special  Committee  on 

Taxation.     Boston,  1894. 

36.  Reports  to  [and  by]  the  Tax  Conference  of  Pennsylvania  Interests, 

1892-1895. 

(1)  Report  of  the  Committee  appointed  ...  to  examine  the  Tax 

Laws  of  other  American  States  and  report  an  Opinion  for 
or  against  the  governing  Principles  embraced  therein  [1892] . 

(2)  Valuation,  Taxation  and  Exemption  in  the  Commonwealth 

of  Pennsylvania.  A  Report  by  the  Commission  on  Valu- 
ation and  Taxation.  Joseph  D.  Weeks,  Chairman.  Har- 
risburg,  1892. 


424  ESSAYS.  IN  TAXATION 

(3)  Report  of  the  Commission  on  Valuation  and  Taxation  [1893] . 

(4)  Valuation  and  Taxation  of  Railroads  in  Pennsylvania.     Har- 

risburg,  1893. 

(5)  Selling    Price,   Assessed  Valuation  and   Taxation    of    Real 

Estate  in  Pennsylvania  [1893] . 

(6)  Minor  Reports  on   Street  Railroads,  Canal  Companies  and 

Mortgage  Indebtedness  [1893]. 

(7)  The  Niles  Tax  Bill.     An  Analysis  of  its  Provisions.     By 

the  Chairman  of  the  Tax  Conference.     1893. 

(8)  Effect  of  the  proposed  Revenue  Bill  on  the  State  Revenues. 

By  Joseph  D.  Weeks,  Chairman  of  the  Tax  Conference. 
1895. 

(9)  An  Analysis  of  the  Revenue  Bill.     By  C.  Stuart  Patterson, 

a  member  of  the  Tax  Conference.     1895. 

(10)  Speech  of  C.  Stuart  Patterson  on  the  Taxation  of  Railroads. 

1895. 

37.  Report  of  the  Committee  of  the  Chamber  of  Commerce  of  Chatta- 

nooga on  Assessments  and  Taxation.     Chattanooga,  1895. 

38.  Report  of  the  Special  Committee   on   Taxation  of  the  Cleveland 

Chamber  of  Commerce.     Cleveland,  1895. 

39.  Eighth  Biennial  Report  of  the  Bureau  of  Labor  Statistics  of  Illinois. 

Subject :  Taxation.     1894.     Second  ed.     Springfield,  1896. 

40.  Twelfth  Annual  Report  of  the  Bureau  of  Labor  Statistics  of  the 

State  of  Connecticut.     [Devoted  to  taxation.]     Meriden,  1896. 

41.  Ninth  Biennial  Report  of  the  Bureau  of  Labor  Statistics  of  Illinois. 

Subject :  Franchises  and  Taxation.     1896.     Springfield,  1897. 

42.  Report  of  the  Commission  appointed  to  inquire  into  the  expediency 

of  revising  and  amending  the  Laws  of  the  Commonwealth   [of 
Massachusetts]  relating  to  taxation.     Boston,  1897. 

43.  Report  of  the   Commission  appointed  by  Governor  Griggs  to  in- 

vestigate the  Subject  of  Taxation  in  the  State  of  New  Jersey. 
Trenton,  1897. 

44.  Report  of  the  Wisconsin  State  Tax  Commission.    Madison,  1898. 

45.  Report  of  the  [Texas]  Tax  Commission  to  inquire  into  the  system  of 

Laws  and  Regulations  now  in  force  affecting  the  raising  of  Public 
Revenues  and  the  disbursement  thereof,  etc.,  etc.     Austin,  1899. 

46.  Report  to  the  Legislature  of  New  York  by  the  Joint  Committee  on 

Taxation.     [Albany],  1900. 


INDEX 


Abatement,  312,  313,  327. 

Abbott,  W.  G.,  263. 

Ability,  see  Faculty. 

Absentees,  110.    See  Non-residents. 

Account  duty  in  England,  307,  308. 

Adams,  C.  F.,  Jr.,  Win.,  193 n.,  263. 

Adams,  H.  C.,  364. 

Adickes,  F.,  333  n.,  336  n.,  338  n. 

Agricultural  land,  32,  75,  85-89,  349. 

Agricultural  products,  imperial  duties 
on  in  Germany,  335. 

Aids,  6,  366. 

Alessio,  205  n. 

Aliens,  taxation  of,  108, 109, 117-119. 

Allegiance,  economic,  see  Economic  in- 
terests ;  political,  see  Citizenship. 

American  Bankers'  Association,  264. 

American  Economic  Association,  272  n. 

American  Law  Review,  246 n.,  263. 

American  Statistical  Association,  24  n. 

Ames,  John  H.,  62,  263. 

Amortization,  see  Capitalization. 

Andrews,  George  H.,  62. 

Antoni,  253  n. 

Apportioned  taxes,  24,  373,  395,  402. 

Argyll,  Duke  of,  340  n.,  356  n. 

Aristotle,  2, 15. 

Assessed  valuations  of  realty  and  per- 
sonalty, 27,  28. 

Assessment,  7,  24,  74,  92,  330,  371,  387, 
403;  special,  see  Special  assessments. 

Assessors  in  Maryland  appointed,  403. 

Athens,  39. 

Atkinson,  Edward,  2(53. 

Aucoc,  282  n. 

Bachelors,  tax  on,  270. 

Bacher,  121  n. 

Bacon,  47. 

Baer,  50  n. 

Baltimore  Tax  Commission,  423. 

Banks,  taxation  of,  141,  143-150,  168, 
170,  177-179,  187,  242,  244,  246,  260, 
316  n.,  405,  413,  415,  420.  See  State 


bank  notes. 


Bases  of  taxation,  72,  111,  366,  370,  383, 
386 ;  changes  in,  16-21,  56,  367. 

Bastable,  132  n.,  281,  282,  292,  304  n., 
350  n.,  391-398. 

Baumann,  340 n.,  347 n.,  351  n. 

Bede,  6,  45. 

Benefit,  special,  70,  82,  275-281, 283,  290, 
294,  296,  297,  301-303,  304,  338,  340- 
357. 

Benefit  theory,  70,  78,  279,  344,  352,  396, 
400,  418 ;  in  local  taxation,  336,  356. 

Bentham,  122-125,  311. 

Bequest,  123-127. 

Betterment  tax,  340-357.  See  Special 
assessments. 

Bibliographies,  American,  of  the  corpo- 
ration tax,  263;  of  the  general  prop- 
erty tax,  62;  of  reports  on  taxation, 
422 

Bielfeld,  50  n. 

Bilinski,  53  n. 

Black,  George  A.,  356 n. 

Black  on  Intoxicating  Liquors,  279 n. 

Blackstone,  180,  265. 

Blumer,  44  n. 

Blunden,  G.  H.,  53  n.,  354  n. 

Bluutschli,  124. 

Boeckh,  39  n. 

Boisguillebert,  49. 

Boissevain,  323  n. 

Bolles,  A.  S.,  408. 

Bonded  indebtedness,  81,  104-106,  169, 
177,  195,  198,  214,  229-237,  247,  252, 
412 ;  of  Pennsylvania  railroads,  231  n. 

Boston  commission,  99  n.,  410,  423; 
Executive  Business  Association,  99  n., 
103  n.,  423. 

Boyle  and  Davies,  53  n.,  348  n.,  350n. 

Bread  tax,  local,  in  Prussia,  338. 

Brentano,  276  n. 

Brooklyn,  assessed  valuations  in,  28. 

Brown,  Frederick  J.,  62. 

Brown,  W.  A.,  42  n. 

Buchanan,  393. 


Buckingham,  393. 
425 


426 


ESS  AYS  IN  TAXATION* 


Budget,  363,  376,  384,  391 ;  equilibrium 

of,  73,  367. 
Building  and  loan  associations,  164, 165, 

420;  in  New  Zealand,  316  n. 
Building  occupancy  tax,  411. 
Burkart,  205  n. 
Business  taxes,  10,  115,  279,  280,  337, 

415 ;  in  Holland,  322-327 ;  in  Prussia, 

331,  332,  335-338. 


Cable  companies,  165. 

California  Board  of  Equalization,  26  n., 

32  n. 

Caligula,  41. 

Canal  companies,  taxation  of,  165,  178. 
Canale,  46  n. 

Canals,  public,  292,  297,  361. 
Canestrini,  50 n.,  51  n. 
Canons  of  justice  in  taxation,  77. 
Capital,  taxation  of,  20,  41. 
Capitalization  of  taxation,  105,  132, 255, 

325,  381,  396. 

Capitation  tax,  see  Poll  tax. 
Caracalla,  41,  42. 
Carli,  46  n. 

Carriage  tax  in  Pennsylvania,  419. 
Carucages,  43. 
Castle,  53  n. 

Cattle  tax  in  Pennsylvania,  419. 
Cecil,  Sir  Robert,  47. 
Census,  Roman,  40;  United  States,  27, 

83  n. 

Chailley,205n.,  372. 
Charters,  corporate,  tax  on,  175, 194, 279. 
Chattanooga    Chamber    of    Commerce 

committee,  424. 

Cheviot  estate  in  New  Zealand,  319. 
Chicago    assessments,    27,    74;    special 

assessments,  283. 

Cincinnati,  assessed  valuations  in,  28. 
Circulating  medium,  tax  on,  proposed 

in  France,  374. 
Citizenship    as    determining    place    of 

taxation,  108,  112, 114, 119. 
City  and  country  property  compared, 

85-89. 

Clamageran,  43 n.,  45  n.,  49  n. 
Classification  of  public  revenues,  265- 

304,  359,  361,  362, 364, 368, 379, 383, 393. 
Class  tax  in  Prussia,  332. 
Clauss,  242  n. 
Cle'ment,  282  n. 

Cleveland  Chamber  of  Commerce  com- 
mittee, 31,  424. 
Cochran,  Thomas,  62. 
Cohn,  50  n.,  57  n.,  363,  365. 


Colbert,  10. 

Coleman,  James  H.,  263. 

Collateral  inheritance  tax,  see  Inheri- 
tance tax. 

Columbia  College  studies,  62,  63,  95  n., 
121  n.,  283  n.,  357  n. 

Commerce,  taxes  on,  4,  19. 

Commissions,  tax  on,  in  Pennsylvania, 
419. 

Communication,  taxes  on,  299,  360. 

Compensation,  2(58,  287. 

Compulsory  contributions,  1-7,  266-268, 
274,  291,  302,  304,  366,  368,  394. 

Confiscation,  3, 124. 

Conflicts  of  jurisdiction,  see  Double 
taxation  by  competing  authorities. 

Conigliani,  379,  380. 

Connecticut  tax  commissions,  31,  34, 
399,  422,  423. 

Conrad's  Jahrbucher,  253  n. 

Consumption,  taxes  on,  9,  111,  307,  337, 
368,  375 ;  local,  in  Germany,  335-338. 
See  Expenditure. 

Contemporary  Review,  357  n. 

Contractual  payments,  266,  267,  274,292- 
302 

Cooley,  Judge  T.  M.,  269,  270,  272,  281, 
287,  347  n.,  351  n. 

Corn  Laws,  11. 

Corn  tax  in  Prussia,  338. 

Corporate  charters,  tax  on,  175, 194,  279. 

Corporations,  taxation  of,  20,  103-107, 
115,  135,  136-264,  395,  397,  402,  404, 
420,  421 ;  American  bibliography,  263; 
complications,  103-107,  115,  157,  213- 
254,  420 ;  history  and  present  condi- 
tion in  America,  136-179,  239,  243, 
402,  403, 410,  413,  415,  416 ;  in  Austria, 
251 ;  in  England,  202,  251 ;  in  France, 

203,  252;  in  Germany,  205,  241,  252, 
339;    in  Holland,  326,  330;   in  Italy, 

204,  251 ;  in  New  Zealand,  315-317;  in 
Switzerland,  202,  216,  222,  239,  248; 
incidence,  105,  254-258 ;  legal  difficul- 
ties, 206-211,  224,  412,  414;  local,  238, 
239,  258-261;   methods,  176-180,  192- 
206,  258-261,  404,  414,  419;  principles, 
180-212;    proposed  reforms,  206-212, 
258,262;  statistics,  176  n. 

Cort  van  der  Linden,  380,  381. 
Cournot,  379. 
Craig,  393. 
Cripps,  351  n. 

Crocker,  George  G.,  62,  247  n. 
Crusades,  44,  45. 

Customs,  4,  366,  367.  See  Import 
taxes. 


INDEX 


427 


Dadelszen,  E.  J.,  320  n. 

Dana,  Richard  H.,  62,  103  n.,  247  n. 

Danegeld,  43. 

Dauphin,  371. 

Da  vies,  53  n.,  348  n.,  360  n. 

Death  duties  in  England,  307-314. 

Debts,  deduction  for,  33,  100,  104,  214, 
389.  See  Bonded  indebtedness. 

Deductive  method,  358. 

Definitions  of  various  public  charges, 
304. 

Degressive  taxation,  312. 

Delaware  Tax  Commission,  410,  423; 
system  of  taxation,  410,  414. 

Democracy,  8,  19,  76,  121, 122, 133,  305, 
306,  391. 

Denis,  282  n.,  369-371,  372. 

Development  of  taxation,  1-22,  366. 

Dietzel,  136  n. 

Differentiation  of  the  income  tax,  57, 
98,  99,  131,  315  n.,  324,  327,  328,  330, 
333,  334,  370;  of  the  property  tax  in 
Switzerland,  387. 

Diffusion  of  taxes,  65,  396,  400,  409 ;  of 
wealth,  125-128. 

Digby,  234  n. 

Dio  Cassius,  41  n.,  42  n. 

Diocletian,  41  n.,  42. 

Direct  and  indirect  taxation  compared, 
4-12,  291,  361,  365-368,  384,  395. 

Direct  taxation,  4-16,  129,  349,  362,  370, 
389,  404;  development  of,  5,  7-12; 
forms  of,  12-16;  in  Athens,  39;  in 
England,  6;  in  France,  371;  in  Hol- 
land, 322,  323;  in  the  New  England 
colonies,  19;  in  Prussia,  335,  338;  in 
Rome,  39. 

Disraeli,  396. 

Distilleries  and  breweries,  164, 168. 

District  of  Columbia,  report  on  taxa- 
tion in,  423. 

Dog  tax,  407. 

Domains,  3,  39,  266,  275,  292,  359,  368, 
395. 

Domicile,  as  determining  place  of  taxa- 
tion, 109-119,  223-243,  309. 

Door  and  window  tax  in  France,  332  n. 

Double  taxation,  95-120,  213-254,  414; 
by  competing  authorities,  96,  107-120, 
223-243,  309,  3(58, 396,  416;  by  the  same 
authority,  33-36,  61,  96-107,  132,  213- 
222,  243-254,  316,  317,  325,  326,  405, 
410 ;  just  and  unjust,  98,  105,  216, 243 ; 
of  corporations,  103-107,  115,  213-254, 
258,  414. 

Douglas,  Charles  H.  J.,  62. 

Dowell,  45  n.,  298  n. 


Dureau  de  la  Malle,  41  n. 

Dutch  system  of  taxation,  322-330. 

Duties,  meaning  of  the  word,  6. 

Economic  conditions,  their  effect  npon 
taxation,  1,  10,  20,  22,  305,  306,  339, 
366. 

Economic  interests,  as  determining 
place  of  taxation,  110-120, 236, 237, 247. 

Economic  rent,  66,  67,  92.  See  Single 
tax. 

Economics  and  finance,  1,  370,  378,  389. 

Elasticity,  73,  381. 

Electric  light  companies,  taxation  of, 
164,  165,  170,  178,  179. 

Electric  light  supply,  public,  295. 

Ellis,  203  n.,  251  n. 

Ely,  Richard  T.,  24  n.,  62,  403,  404. 

Eminent  domain,  267,  274,  284,  302. 

Endicott,  William,  Jr.,  62. 

Engels,  46  n. 

English  commissioners,  48,  52  n.,  346  n.f 
347,  348  n.,  349  n.;  House  of  Lords 
committees,  340  n.,  348  n.,  353,  364; 
system  of  taxation,  307-314. 

Ensley,  Enoch,  62. 

Equal  sacrifice  theory,  396. 

Equality,  see  Uniformity. 

Equalization,  25,  402,  405,  410,  412,  413. 

Escheat,  3, 122-125,  311. 

Eschenbach,  121  n. 

Estate  duty  in  England,  307-313. 

Ethical  aspects  of  taxation,  5,  21,  54, 
60,  72,  77,  366,  367. 

Etymology  showing  the  development  of 
taxation,  5. 

Evasion  of  taxes,  30,  37,  131,  194,  199, 
387 

"  Evil  duties,"  4,  366. 

Exchange,  taxes  on,  9. 

Excise,  4,  9-12,  19,  129,  188,  233,  322, 
323,  366,  367. 

Exemption,  10,  186,  293,  312-314,  316, 
317,  325,  327,  335,  387,  410,  419;  of 
agricultural  capital,  326;  of  debts, 
33-36,  100,  389;  of  improvements  in 
New  Zealand,  314,  317,  319-322;  of 
manufacturing  corporations  and  en- 
terprises, 167-170,  199,  260,  320;  of 
municipal  bonds,  417;  of  mortgages 
in  Massachusetts,  416,  417;  of  per- 
sonal property,  52,  403;  of  United 
States  securities,  145. 

Expenditure,  as  a  test  of  faculty,  10,  21, 
111,  332,  372. 

Expenditure,  public,  see  Public  expendi- 
tures. 


428 


ASSAYS  IN  TAXATION 


Expenditure,  taxes  on,  10,  57,  64,  332, 

338,  372,  374.    See  Consumption. 
Export  taxes,  19. 
Express  companies,  162,  179. 
Expropriation,  268,  274,  302,  303. 

Faber,  276  n. 

Faculty  or  ability  as  the  basis  of  taxa- 
tion, 72,  82,  111,  119, 193,  274,  275,  286, 
297,  302,  304,  322,  330,  337,  339,  343- 
347,  349,  350,  356,  381,  383,  396,  400, 
404,  415,  420, 421 ;  development  of  the 
idea,  3,  5, 17,  21,  367,  368 ;  in  relation 
to  the  inheritance  tax,  122, 130,  133 ; 
to  progressive  taxation,  312,  327 ;  tests 
of,  5,  14,  18,  21,  53-56,  111,  193,  326, 
332, 346,  347,  368,  372,  386,  415. 

Faculty  tax  in  the  New  England  colo- 
nies, 19,  55,  56  n. 

Family  theory  of  property,  124, 126. 

Farmers,  burden  of  taxes  on,  32,  85 ;  in 
Delaware,  411 ;  in  New  Zealand,  320, 
321. 

Fees,  4,  19,  70,  268,  272,  274-282,  296-300, 
337,  338,  359-361,  366,  368,  379,  394; 
definition,  304;  distinguished  from 
special  assessments,  289-292;  from 
taxes,  273-282,  302-304, 352 ;  of  county 
officers  in  Pennsylvania,  419.  See 
License  fees. 

Ferries,  taxation  of,  in  Alabama,  164, 179. 

Feudal  charges,  43, 121,  265. 

Field,  Justice,  21  n.,  233-235. 

Fifteenths  and  tenths,  45,  46. 

Finance,  private  and  public,  392. 

Finance  Statistics  of  the  American 
Commonwealths,  24  n.,  153  n.,  279  n. 

Finanz-Archiv,  108  n.,  205  n.,  242  n., 
253  n.,  254  n.,  323  n.,  332  n.,  338  n., 
385. 

Fines,  3, 19,  268,  274,  302,  303,  394. 

Finley,  J.  H.,  62. 

Foreigners,  see  Aliens. 

Foster,  Roger,  263. 

Franchise  tax,  150,  153,  157,  159,  167, 
170-175,  179, 180-192, 207,  208, 259, 260, 
279,  295,  415. 

Frankenstein,  367. 

Franklin,  299  n. 

Freight  lines,  165. 

French  Revolution,  76,  416. 

Frend,  393. 

Friedberg,  333  n. 

Gaius,  39  n. 
Gallopin,  374. 
Gamier,  Joseph,  392. 


Gas  companies,  taxation  of,  164,  165, 
170,  178,  179. 

Gas  supply,  public,  293,  295,  301. 

Gemeiner  Pfennig,  45. 

General  corporation  tax,  139,  159,  166- 
174,  177,  258,  260. 

General  property  tax,  19-21,  23-63,  90, 
135, 136, 314,  321,  331,  338, 372,  373,  377, 
385-387,  402,  404,  408-413;  American 
bibliography  of,  62;  applied  to  cor- 
porations, 138,  140,  154,  161,  166,  173, 
174,  192,  202,  213,  240,  256,  259;  his- 
tory of,  37-53,  59;  practical  defects 
of,  24-37,  61;  statistics  of,  176  n.; 
theory  of,  54-60,  418. 

George,  Henry,  65,  69,  84,  93,  319, 321. 

Georgia,  comptroller-general's  report, 
54  n. 

Giffen,  392. 

Gifts,  2,  6,  266,  267, 302 ;  death-bed,  309. 

Gladstone,  314. 

Goodnow,  Frank  J.,  206  n.,  272  n. 

Goschen,  53  n.,  313. 

Governmental  enterprises,  292-302,  359, 
368.  See  Canals,  Gas  supply,  Electric 
light  supply,  Post  office,  Railroads, 
Telegraphs,  Telephones,  Water  sup- 
ply, etc. 

Governmental  services,  4,  70,  267,  275- 
278,  284,  287,  292-302,  304,  344,  352, 
353,  361 ;  gratuitous,  298,  299. 

Graduated  taxation,  see  Progressive  tax- 
ation. 

Graduation  according  to  relationship,  in 
the  inheritance  tax,  124,  133,  307,  310. 

Gratuitous  contributions,  266,  267,  302. 
See  Gifts. 

Gross  and  net  earnings,  153,  178,  179, 
196,  198-212,  238,  404,  416. 

Guyot,  372-374. 

Hab-,  Gut-  und  Kopfsteuer,  44. 

Hamilton,  Alexander,  9. 

Hamilton,  John,  62. 

Harcourt,  Sir  Vernon,  311,  313,  314,  333. 

Harrison,  Charles,  348  n.,  349  n.,  351  n. 

Heckel,  100  n.,  104  n. 

Hedley,  53  n. 

Hegewisch,  40  n. 

Held,  366. 

Helferich,  254  n. 

Heriot,  121. 

Hildebrand's  Jahrbiicher,  13  n.,  39  n., 

40n.,42n. 
Hill,  J.  A.,  332  n. 
Hillhouse,  Thomas  J.,  263. 
Hills,  Thomas,  63,  103  n. 


INDEX 


429 


Hinckley,  Isaac,  62. 

Historical  method,  358,  359. 

Historical  school,  358. 

Hobbes,  1,  10. 

Hoffman,  46  n.,  50  n. 

Hopkins,  S.  M.,  263. 

Horses  and  cattle,  tax  on,  in  Pennsyl- 
vania, 419. 

House  of  Lords  committees,  340  n.,  348  n. , 
353,  354;  Standing  Orders,  353  n.,  354. 

House  tax,  91;  in  Germany,  331,  332, 
335,  337,  338. 

Hiillman,  45  n.  • 

Humbert,  40  n. 

Humphrey,  A.  W.,  63. 

Hunter,  234  n. 

Huschke,  40  n. 

Huxley,  68  n. 

Idaho  comptroller's  report,  29  n. 

Elinois  Revenue  Commission,  25  n.,  31, 
401,  423. 

Import  taxes,  6, 19,  75,  270,  322,  374. 

Imposts,  6,  367,  368. 

Impot  unique,  11. 

Improvements  on  land,  exemption  of, 
in  New  Zealand,  314,  317,  319-322; 
value  of,  85-88,  320. 

Incidence,  see  Shifting. 

Income,  as  a  test  of  faculty,  18,  21,  55, 
56,  111,  332,  415;  different  kinds  of, 
98, 100, 130, 131,  218,  315, 316,  324,  327, 
328,  334,  387,  409;  meaning  of  term, 
200,  201. 

Income  tax,  6,  18,  56,  73,  98,  114-118, 
135,  261,  337,  359,  369,  371-373,  397, 
404,  405,  409,  415,  421 ;  corporate,  198- 
206,  216,  217,  240,  241,  256,  326,  408; 
federal,  21, 84, 114, 115, 118, 201, 409  n. ; 
in  the  American  colonies  and  states, 
65,  56  n.,  99,  117,  403,  408, 411, 413, 416, 
418 ;  in  Australasia,  314-316,  321 ;  in 
England,  74,  115,  251,  307,  311-314, 
325,  373;  in  France,  416;  in  Holland, 
323-330;  in  Italy,  373;  in  Prussia, 
332-338 ;  in  Switzerland,  373.  See  Dif- 
ferentiation ;  Progressive  taxation. 

Indirect  taxes,  4-12,  72,  129,  204,  300, 
362  ;  development  of,  4,  7-12 ;  in  Eng- 
land, 11 ;  in  France,  371,  373 ;  in  Ger- 
many, 335,  338;  in  Holland,  10, 19, 322, 
328 ;  in  New  Zealand,  321 ;  in  the  South- 
ern colonies,  19;  local,  9,  337-339. 

Industrial  revolution,  7,  52. 

Inheritance,  122-129. 

Inheritance  tax,  6,  115,  121-135,  261, 270, 
339,  360,  395,  397,  420, 421 ;  in  America, 


128,  129,  133,  311,  388,  406,  410,  413, 
415,  419 ;  in  Australia,  133,  311  n. ;  in 
Canada,  133;  in  England,  121,  133, 
307-314  ;  in  France,  121,  374 ;  in  Hol- 
land, 121,  324;  in  Prussia,  334,  342; 
in  Rome,  42,  121;  in  Switzerland,  133, 
388;  statistics  of,  134 n.,  314;  theories 
of,  122-133.  See  Graduation;  Pro- 
gressive taxation. 

Innocuity  of  taxation,  380. 

Insurance  companies,  139, 141-154,  168, 
170,  178,  179,  203,  205,  237,  242,  260, 
279,  405,  420. 

Insurance  theory,  129.  See  Benefit 
theory. 

Interest,  taxes  on,  in  Germany,  331, 335, 
336. 

Intermunicipal  complications,  114,  238. 

Internal  revenue  taxes,  6,  9,  198,  255  n., 
270;  in  Holland,  322. 

Interstate  agreements,  114, 120,  237, 247, 
262,  414. 

Interstate  Commerce  Commission,  201. 

Interstate  commerce,  interference  with, 
183,  187,  190,  206-211. 

Interstate  complications,  107-120,  401, 
408;  in  corporation  taxes,  157,  195, 
223-243,  246,  248. 

Inventory  of  property  after  death,  132, 
387. 

Iowa  auditor's  report,  29  n.,  33  n. ;  Reve- 
nue Commission,  74,  410,  423. 

Jakob,  382. 

Jastrow,  J.,  332  n.,  333  n. 

Jevons,  380,  392. 

Joint-stock  companies,  167, 170, 176,  182, 
203. 

Judicial  interpretation  and  social  prog- 
ress, 270-273. 

Justi,  275. 

Justice  in  taxation,  21, 305, 339,  364,  367, 
370;  canons  of,  77.  See  Uniformity; 
Universality. 

Kauffmann,  252  n. 

Kentucky  auditor's  report,  33  n. 

Kenyon,  Lord,  52. 

Knott,  R.  W.,  63. 

Koenig,  371,  372. 

Kriiger,  121  n. 

Labor  theory  of  property,  67,  69. 
Lactantius,   42. 
Laissez-faire,  396. 
Land  as  a  test  of  faculty,  14,  347. 
Land  nationalization,  68,  69. 


430 


ESSAYS  IN  TAXATION 


Landschoss,  46. 

Land  tax,  10,  14,  53,  65,  66,  337, 397 ;  in 
Athens,  39;  in  England,  43,  51,  325; 
in  France,  373,  402 ;  in  Holland,  322, 
324,  325,  327;  in  New  Zealand,  314- 
322 ;  in  Prussia,  331,  332,  335,  338 ;  in 
Rome,  40;  in  Switzerland,  386.  See 
Real  property  tax. 

Land  values,  78,  79,  85-89,  320;  tax  on, 
see  Single  tax. 

Lane,  J.  A.,  63,  99  n. 

Lang,  46  n. 

Lassalle,  9. 

Layton,  A.  T.,  308  n. 

Leeman,  282  n. 

Legacy  duty  in  England,  307,  308,  310. 

Leidig,  282  n. 

Leroy-Beaulieu,  37  n.,  282,  359,  371,  382. 

Levasseur,  42  n. 
JLewald,  205  n.,  254  n. 

Lewis,  137  n.,  243  n.,  259 n. 

Lex  Huene,  335. 

License  fees  and  taxes,  20, 165, 175,  272, 
273,  279,  281,  350,  351,  360,  404,  408, 
410,  419.  See  Corporations. 

Liquor  licenses,  76,  270,  271,  281. 

Liquor  tax  in  Holland,  323. 

Listing  system,  405,  412,  415,  417. 

Literature  of  taxation,  American,  62, 
263,  399-424;  European,  358-398; 
Dutch,  377,  380-383 ;  English,  389-398 ; 
French,  369-377;  German,  358-369; 
Italian,  377-380;  Portuguese,  382; 
Spanish,  382-384;  Swiss,  384-389. 

Livy,  40  n. 

Loans,  tax  on,  169, 178,  419. 

Local  option  in  taxation,  412,  413. 

Local  taxation,  96,  337,  397 ;  in  America, 
24,  285,  341,  345;  in  Austria,  301;  in 
England,  51,  285,  286,  301,  312,  313, 
341,  345-350;  in  Germany,  330,  333, 
335-338;  in  Holland,  323-330;  in  New 
Zealand,  321;  in  Switzerland,  389;  its 
relation  to  the  general  tax  system, 
330,  333,  335-339, 401^03,  407,  410, 413, 
418-420;  of  corporations,  238,  258-261, 
407. 

Loening,  282  n. 

London  County  Council  Orange  Book, 
341  n.,  342 n.,  343 n.,  348 n. 

Loria,  379. 

Lorrain,  374. 

Machiavelli,  51. 

Madox,  44  n.,  181  n. 

Maine  Tax  Commission,  405,  423. 

Malthus,  391. 


Mansfield,  Lord,  52. 

Manufacturing  corporations,  139,   167- 

170,  173,  199,  260,  419,  420. 
Manumission  tax  in  Rome,  42. 
Marginal  utility,  theory  of,  276,  378-380, 

383. 

Marquardt,  40  n.,  41  n. 
Marriage  licenses  and  fees,  290,  291,  351, 

394. 
Maryland  system  of  taxation,  403 ;  Tax 

Commission,  403,  410,  423. 
Massachusetts    Anti  -  Double  -  Taxation 

League,  103  n. ;  commissions,  34,  35  n., 

84,  400,  416,  422,  423. 
Matthews,  Nathan,  103  n. 
Matthias,  40  n. 
Mazzola,  378. 
McCulloch,  367,  369,  390. 
Meat  tax,  in  Holland,  323;   local,  in 

Prussia,  338. 

Mediaeval  towns,  9,  43,  44,  55. 
Meier,  205  n. 
Meili,  249  n. 
Meitzen,  241  n. 
Menier,  372,  373. 
Mercantilism,  390. 
Methods  in  economics,  358. 
Meyer,  Christian,  44  n. 
Mill,  J.  S.,  98, 125-127, 376,  381,  390,  391, 

396. 

Mines,  public,  360. 
Mines  and  mining  companies,  taxes  on, 

164-167, 177-179 ;  in  Prussia,  338. 
Minimum  of  subsistence,  307,  314,  327, 

328,  365,  370. 
Minot,  William,  Jr.,  63. 
Miquel,  333,  334,  339. 
Mobiliapersonamsequuntur,  112, 113n.f 

224,  225.    See  Domicile,  Situs. 
Mommsen,  40  n. 
Monopolies,  80,  81,  277,  368,  396,  404; 

fiscal,  293,  300,  361,  368 ;  public,  295, 

296,  360. 

Montana  Board  of  Equalization,  87. 
Moore,  Edward  C.,  Jr.,  246  n.,  263. 
Moral  obligation  to  support  the  govern- 
ment, 3,  5,  54,  72,  77. 
Mortgages,  35, 101-104, 169, 234,  318,  389, 

406,  410,  413,  414,  416,  417,  421 ;  situs 

of,  102 ;  taxed  as  realty,  29,  102,  316, 

406. 
Municipal  enterprises,  293,  295,  298, 299 ; 

in  Prussia,  338. 

Natural  rights,  67,  69,  78,  124. 

Nausinicus,  39. 

Nebraska  auditor's  report,  25  n. 


INDEX 


431 


Necessaries,  taxes  on,  10. 

Necker,  49  n. 

Neefe,  336  n. 

Net  earnings,  see  Gross  and  net  earn- 
ings. 

Neumann,  291  n.,  360-362,  366. 

New  Hampshire  tax  report,  31,  401,  422. 

New  Jersey  comptroller's  report,  285  n. ; 
commissions,  31  n.,  34,  399,  401,  410, 
422,  423. 

New  York  City,  bank  officers'  commit- 
tee, 264 ;  building  lots,  91 ;  commission- 
ers' reports,  31  n.,  36 n.;  corporation 
taxes,  239;  land  values.  78;  Rapid 
Transit  Commission,  78;  special  as- 
sessments, 283. 

New  York  State,  assessors'  reports, 
25  n.,  26 11.,  33  n.,  36  n.,  402,  413 ;  com- 
missions and  joint  committees,  26  n., 
35,  113  n.,  399-401,  410,  411,  413,  422, 
423 ;  comptroller's  report,  36  n. ;  coun- 
sel to  revise  the  tax  laws,  31,  411-413, 
423. 

New  Zealand,  colonial  treasurer's  state- 
ment, 319;  commissioner  of  taxes' 
statement,  322  n. ;  Official  Year-book, 
320 n.,  322 n.;  plan  of  governmental 
purchase,  319,  356 ;  recent  tax  reforms 
in,  314-322. 

Niles  tax  bill,  424. 

Noble,  53  n. 

Non-residents,  taxation  of,  110, 115, 116, 
118,  148,  229,  242. 

North  Dakota  Board  of  Equalization, 


Oberly,  J.  H.,  141  n.,  193  n.,  263. 

Object  of  taxation,  395. 

Occupation  taxes,  279,  408. 

Occupation  theory  of  property,  67. 

Octroi,  9,  44. 

Ogden,  Charles  S.,  422. 

Ohio  Tax  Commission,  31,  414-416,  423. 

Oil  companies,  165. 

Oleomargarine,  tax  on,  76,  270. 

Olmstead,  M.  G.,  263. 

O'Meara,  J.  J.,  53  n. 

Opium,  tax  on,  76,  270. 

Opportunity,  78,  82. 

Oregon    tax   commissions,    35  n.,   410, 

423. 

Organization  tax,  175,  194,  279. 
Oronzo  Quarta,  204  n. 

Pacific  railroads,  200. 
Palace  car  companies,  163. 
Palgrave,  53  n. 


Parieu,  39  n.,  362,  382,  384. 

Partnerships,  97,  167. 

Patterson,  C.  S.,  263,  424. 

Peabody,  A.  P.,  63. 

Peel,  314. 

Penal  power,  267,  268,  302. 

Penalties,  see  Fines. 

Pennsylvania,  auditor-general,  407,  422; 

commissions,  86,  211,  399,  406,  417, 

418,   422-424;    Tax    Conference,    86, 

194  n.,  231  n.,  237,  417-420, 423,  424. 
Pepper  and  Lewis,  137  n.,  243  n.,  259  n. 
Pepys'  Diary,  342. 
Percentage  taxes,  24,  374,  395,  402. 
Pereira  Jardim,  382. 
Perjury,  31. 
Perry,  A.  L.,  63. 
Personal  property  tax,  15,  27,  136,  147, 

374,  397,  400,  401,  403,  405,  409,  410, 

412,  415,  419,  421. 
Personal    taxes,   18,  337;    in  Holland, 

322,  323,  330;  in  Prussia,  331,  333. 
Petty,  10,  48,  266. 

Philadelphia,  value   of   land  and   im- 
provements in,  86. 
Philippsberg,  253  n. 
Phillips,  53  n. 
Physiocrats,  77,  389,  390. 
Piernas-Hurtado,  382-384. 
Piersou,  322,  323,  325,  327,  330,  333,  380, 

381. 

Pingree,  Mayor,  298. 
Pipe-line  companies,  165. 
Place  of  taxation,  107-120,  223-243,  309, 

368,  397,  416. 
Pliny,  125. 
Police   or    regulative  power,  267,  268, 

269-274,  280,  281,  284,  302. 
Political  effects  of  taxation,  75. 
Political  Science  Quarterly,  15  n.,  42  n., 

50  n.,  56  n.,122n.,  125n.,  137  n.,  206n., 

351  n.,  409  n. 
Poll  tax,  12,  19,  21,  41,  43,  44,  360,  366, 

386,  389,  405,  410. 
"  Pool  tax  "  in  New  York,  165. 
Poor  law,  390;   commissioners,  52  n., 

346  n.,  347,  348  n.,  349  n. 
Poor  rate  in  England,  51,  285,  346,  347, 

349  n. 

Post  office,  267,  292,  295,  296,  298. 
Potato  tax,  local,  in  Prussia,  344. 
Prerogatives,  3,  4,  265,  275, 360,  366, 368, 

393. 
Price,  276,  292-304;   private,  298,  362; 

guewi-private,  294,  297,  298,  302-304 : 

public,  296,  298,  301-304. 
Primitive  society,  2, 12,  366. 


432 


ESSAYS  IN  TAXATION 


Probate  duty,  121 ;  in  England,  128,  307, 
308,  313. 

Probate  fees,  128. 

Probyn, 53  n. 

Produce  taxes,  14, 19,  43. 

Product,  as  a  test  of  faculty,  14,  21,  55, 
56,  60,  332,  368 ;  taxes  on,  17,  111,  331, 
335, 373. 

Profits,  taxes  on,  366,  396. 

Progressive  taxation,  32,  111  n.,  127, 128, 
286,  314,  317,  318,  323,  359,  364,  370, 
378,  381,  388;  in  America,  133,  134, 
143,  152,  158,  164,  196,  413,  414,  417; 
in  Athens,  39;  in  England,  307-314; 
in  Holland,  323,  327-330 ;  in  Prussia, 
333, 334 ;  of  corporations,  143, 152, 158, 
164,  196 ;  of  house  rent,  323,  330,  372 ; 
of  incomes,  39,  360,  388,  396 ;  of  in- 
heritances, 130,  133-135,  310-312,  317, 
318,  388,  396,  413,  414,  417 ;  of  land  in 
New  Zealand,  317-319,  321,  356;  of 
property  in  Switzerland,  50,  388. 

Property,  as  a  test  of  faculty,  5, 13,  21, 
63,  54,  60,  193,  346,  386 ;  in  land,  66, 
68 ;  theories  of,  67, 124, 126. 

Property  taxes,  367,  397;  in  the  Ameri- 
can colonies,  19;  in  Athens,  39;  in 
France,  373 ;  in  Holland,  324-330 ;  in 
Italy,  373 ;  in  New  Zealand,  314,  317, 
318,  321 ;  in  primitive  communities,  5, 
13, 366 ;  in  Prussia,  98, 331, 334,  338 ;  in 
Rome,  40 ;  in  Switzerland,  50, 98,  386, 
388 ;  supplementary,  57,  98,  334,  337, 
338.  See  General  property  tax ;  Per- 
sonal property  tax ;  Real  property  tax. 

Proportional  taxation,  23,  128,  286,  364, 
366,  389. 

Protection,  75,  270. 

Protection  theory  of  taxation,  5,  129, 
366, 418.  See  Benefit  theory. 

Prussian  system  of  taxation,  330-339. 

Public  economic  income,  394. 

Public  expenditures,  7,  363,  383,  393; 
recent  increase  of,  in  England,  391. 

Public  price,  296-298, 301-304. 

Public  property,  3,  302.    See  Domains. 

Public  purpose  or  interest,  268,  274, 284- 
286,  294-297,  299,  302-304,  344,  352, 
361. 

Quarterly  Journal  of  Economics,  103  n., 

332  n. 
Qwasi-private  price,  294,  297,  298,  302- 

304. 

Quid  pro  quo  theory,  see  Benefit  theory. 
Quincy,  J.  P.,  63. 
Quit-rents,  18. 


Racing  associations,  165. 

Rae,  John,  356  n. 

Railroads,  in  Ohio,  415;  in  Pennsylva- 
nia, 231  n. ;  public,  292,  295,  297,  359, 
361;  taxation  of,  81,  141,  142, 154-160, 
171,  177-179,  184,  188,  196,  199-203, 
205,  226,  242,  260,  404,  405,  408,  415. 
See  Corporations ;  Street  railways. 

Raleigh,  Sir  Walter,  47. 

Rated  taxes,  395.  See  Percentage 
taxes. 

Rates,  7,  346,  350,  352.  See  Poor  rate ; 
Special  taxes. 

Rau,  274,  275,  362,  382. 

Raynaud,  A.,  374. 

Real  property  tax,  19,  53,  59,  65,  74,  90, 
259-261,  337,  386,  388,  411 ;  as  a  local 
tax,  402,  403,  408,  410,  413,  419,  420. 

Real  taxes,  18,  331,  337,  338. 

Reciprocal  laws,  117, 151,  165. 

Recoupment,  354. 

Reforms,  recent,  in  taxation,  135,  305- 
339 ;  in  England,  307-314 ;  in  Holland, 
322-330 ;  in  Prussia,  330-339 ;  in  New 
Zealand,  314-322. 

Regalia,  265,  275,  360,  393. 

Registration  duties  in  Holland,  323. 

Regressive  taxation,  32,  72,  128,  375, 
396. 

Relief,  121. 

Rent,  90,  91,  372. 

Rentals  tax  in  Germany,  335,  336,  338, 
339;  in  Holland,  322,  323,  330;  pro- 
gressive, 323,  330,  372;  proposed  in 
Maryland,  403;  proposed  in  New 
York,  400,  401. 

Residence,  see  Domicile;  Temporary 
residence. 

Retaliatory  laws,  151. 

Revolution,  American,  76;  French,  76, 
416 ;  industrial,  7,  52. 

Rhode  Island  joint  committee,  422. 

Ricardo,  66,  390,  391,  396. 

Ricca-Salerno,  377, 378. 

Ripley,  William  Z.,  63. 

Ritchie,  68  n. 

Rochester,  N.Y.,  28. 

Rodbertus,  13,  39  n.,  40  n.,  41  n. 

Rogers,  Thorold,  53  n. 

Roguin,  244  n. 

Rome,  8,  39-43. 

Ropes,  J.  C.,  63. 

Roscher,  34  n.,  293  n.,  364-366. 

Rosewater,  Victor,  283  n.,  287  n.,  343  n., 
351  n.,  356,  356  n. 

Ruger,  Chief  Justice,  227. 

Ruggles,  Judge,  284. 


INDEX 


433 


Saladin  tithe,  45. 

Salt  monopoly,  293,  300,  360 

Salt  tax,  323. 

Sanction,  power  of,  268.  See  Police 
power. 

San  Francisco,  value  of  land  and  im- 
provements in,  86. 

Savigny,  40  n. 

Savings,  taxation  of,  56. 

Sawyer,  George  Y.,  31  n.,  422. 

Sax,  282  n.,  377-389. 

Say,  Le'on,  50  n.,  371. 

Sayer,  393. 

Schaffle,  366,  381. 

Schall,  293  n. 

Schanz,  108  n.,  214  n.,  216  n.,  222  n., 
240  n.,  241  n.,  248  n.,  249  n.,  250  n., 
251  n.,  253  n.,  384-389. 

Schmoller,  46n.,50n. 

Schonberg,  44  n.,  251  n.,  293  n. 

Schreiber,  240  n.,  249  n. 

Schwab,  J.  C.,  63. 

Science  of  finance,  392 ;  recent  develop- 
ment of,  358-398. 

Scot  and  lot,  43. 

Scutages,  43. 

Seisser,  253  n. 

Self-assessment,  330,  371,  387. 

Separation  of  state  and  local  revenues, 
333,  339,  401-403,  410,  413,  418-420. 

Services,  personal,  3,  366;  govern- 
mental, 4,  70,  267,  275-278,  284,  287, 
292-302,  304,  344,  352,  353,  361. 

Settlement  estate  duty  in  England,  309. 

Shearman,  Thomas  G.,  24  n.,  63. 

Sherman,  Isaac,  63, 65. 

Shifting  and  incidence  of  taxation,  65, 
66,  91,  101,  381,  365,  370,  390,  395,  396, 
400,  408;  of  corporation  taxes,  105, 
254-258.  See  Capitalization, 

Shipgeld,  43. 

Short,  Edward  L.,  263. 

Sinclair,  33  n.,  44  n. 

Single  tax,  on  capital,  65;  on  expense, 
10,  64 ;  on  houses,  64;  on  incomes,  65. 

Single  tax  on  land  values,  61  n.,  64-94, 
270,  319-322,  352,  411,  417,  418;  prac- 
tical defects  of,  73-93 ;  theory  of,  66-73. 

Single  Tax  League  platform,  67. 

Situs,  52,  110-120,  223,  224:  of  mort- 
gages, 102. 

Sleeping  car  companies,  163, 178,  179. 

Smith,  Adam,48n., 49  n.,132, 266,274, 275, 
281,  351  n.,  359,  389,  390,  394,  396,  411. 

Soap  tax  in  Holland,  323. 

Social  effects  of  taxation,  76,  93, 269-273, 
320. 

2r 


Socialism,  69,  122,  127,  299,  311,  327, 359, 
366,  383,  396. 

Social  progress  and  judicial  interpreta- 
tion, 270-273. 

Social  utility  theory  of  property,  68,  300. 

Sociology  and  finance,  370. 

Socio-political  theory,  269,  327,  363,  364, 
366. 

Solon,  39. 

Sovereign  powers,  267-269. 

Spear,  T.  J.,  263. 

Special  assessments,  70, 93, 266, 274, 282- 
292,  337,  338,  340-357,  394;  definition, 
304 ;  distinguished  from  fees,  289-292 ; 
from  taxes,  272,  285-288,  302-304,  343- 
S53 ;  origin  of,  340-343 ;  statistics  of, 
283. 

Special  taxes,  278,  285,  286, 297, 345-350. 

Speculation,  79,  80;  in  real  estate,  58, 
79,  92,  308. 

"  Speenhamlaud  Act,"  52. 

Speiser,  240  n.,  244  n. 

Stamp  taxes,  11, 122,  204.  374 ;  in  Penn- 
sylvania, 419. 

State  bank  notes,  tax  on,  76,  270. 

Statistics  of  assessed  valuations,  27,  28; 
of  the  comparative  value  of  land  and 
improvements,  85-88,  320 ;  of  the  cor- 
poration tax  and  general  property 
tax,  176  n. ;  of  the  inheritance  tax, 
134  n.,  314;  of  railroads  in  Pennsyl- 
vania, 231  n. ;  of  special  assessments, 
283. 

Steamboat  companies,  165,  166, 178. 

Stein,  366. 

Stevens,  B.  F.,  263. 

Stevens,  W.  B.,  263. 

Stock  in  trade,  52, 145. 

Story,  112  n. 

Stourm,  49  n.,  375-377. 

Street,  422. 

Street  railways,  public,  293;  taxation 
of,  164,  165,  238,  271. 

Subject  of  taxation,  395. 

Subsidies,  2,  6,  18,  47. 

Succession  duty  in  England,  307, 308, 310. 

Succession  tax,  see  Inheritance  tax. 

Suetonius,  41  n. 

Sugar  monopoly,  300. 

Sugar  tax,  in  Holland,  323. 

Sugar  Trust,  81. 

Sully,  49. 

Swiss  system  of  taxation,  384-389. 

Tacitus,  41  n. 
Taille,  43,  49. 
Tallages,  43,  45. 


434 


ESSAYS  IN"  TAXATION" 


Tanquerey,  203  n.,  252  n. 

Taxes  defined  and  distinguished  from 

other  public  charges,  7,  71,  269,  270, 

272-289,  297,  298,  300,  302-304,  343-352, 

366    368   394 
Taxing  power,  267, 269-275,  280, 281,  284, 

288,  289,  343,  350,  351. 
Tax   officials,  elective  and  appointive, 

403,  418. 
Tayler,  48  n. 
Telegraph  companies,  taxation  of,  160, 

177,  226. 

Telegraphs,  public,  2G7,  292,  295,  361. 
Telephone  companies,  taxation  of,  161, 

178,  227,  228. 

Telephones,  public,  292,  295. 
Temporary    residence    as   determining 

place  of  taxation,  109. 

Tennessee  comptroller's  report,  33 n. 

Theodosian  code,  42. 

Thiers,  400,  411. 

Thurman  law,  200. 

Tithes,  14,  41,  45. 

Tobacco  factories  taxed  in  Kentucky, 
164. 

Tobacco  monopoly,  293,  300,  360. 

Toll-bridges  taxed  in  Alabama,  164,  179. 

Tolls,  4,  70,  274,  290,  297,  298,  350,  352, 
361,  366. 

Towusend,  M.  I.,  26  n. 

Transfers  and  transactions,  taxes  on, 
121,  122,  129,  204,  325,  360,  415;  in 
France,  374;  in  Germany,  335,  336; 
in  Holland,  323. 

Transportation,  taxes  on,  299. 

Transportation  and  transmission  com- 
panies, 154-167, 178,  226,  237,  242,  260, 
262,407. 

Treasure,  2. 

Treasure-trove,  360. 

Tribute,  2. 

Tributum  civium,  39;  soli,  41. 

Trinoda  necessitous,  3,  366. 

Trust  companies,  165,  170,  178,  420. 

Turnpike  companies  taxed  in  Kentucky, 
164, 178. 

Ulpian,  39  n. 

Umpfenbach,  125,  359,  360. 

Unearned  increment,  66,70,76,78-82,92, 

352,  a>i,  356,  357. 
Uniformity  of  taxation,  25,  61,  77,  186, 

220,  268,  287,  380,  384. 
Universality  of  taxation,  27,  61,  64,  71, 

77,  366,  380,  384,  396. 
Utility,  marginal  or  final,  276,  378-380, 

383 ;  social,  68,  300. 


Value,  a  social  product,  80 ;  of  land  and 
improvements,  85-89,  320;  of  realty 
and  personalty,  29. 

Vauban,  49. 

Veblen,  T.  B.,  363  n. 

Vectigalia,  39. 

Vespasian,  41. 

Vicesima  hereditatium,  121. 

Vignes,  205  n.,  252 n. 

Villani,46n. 

Virginia  report  on  taxation,  422. 

Viti  de  Marco,  378. 

Vocke,  293  n.,  365-369. 

Voltaire,  77,  78. 

Voluntary  contributions,  1-7,  18,  267, 
291,  304,  366. 

VonScheel,  121  n. 

Vuitry,  43  n. 

Wages,  92;  tax  on,  in  Holland,  326;  in 

Germany,  331,  335,  336. 
Wagner,  34  n.,  50  n.,  251  n.,  268, 269,  291, 

293 n.,  332  n.,  362-366,  382. 
Walker,  Amasa,  34,  406. 
Walker,  F.  A.,  56. 
Walker,    Francis,    63,    95  n.,     113  n., 

120  n. 

Walpole,  33. 
Walter,  40 n.,  41  n. 

Washington  State  Board  of  Equaliza- 
tion, 88;  territorial  auditor's  report, 

29  n. 

Water  companies,  164, 179. 
Water  rate  or  tax,  301. 
Water  supply,  public,  278,  293,  295,  298, 

301. 

Weeks,  Joseph  D.,  194  n.,  423,  424. 
Wells,  David  A.,  63,  269,  399,  400,  411. 
West,  Max,  121  n.,   122  n.,  125,  128  n., 

132  n. 
West  Virginia  auditor's  report,  85 ;  Tax 

Commission,    25  n.,    32,    33  n.,    401, 

422. 

Whitmore,  William  H.,  63. 
Williams,  Chauncy  P.,  263. 
Williams,  W.  B.,  141  n.,  194  n.,  263. 
Willis,  Benjamin  A.,  63. 
Window  tax  in  France,  332  n. 
Wood,  Frederick  A.,  63. 
Worms,  375. 
Worsement,  354. 
Worthington,  T.  K.,  63. 
Wright,  John  A.,  211  n.,  263,  408,  409. 

Zeumer,  44  n. 

Zorli,  378,  379. 

Zurcher,  240 n.,  248  n.,  249 n.,  250 n. 


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